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In the 1990s, as a college student already dabbling in investing, Kunal Kapoor, ’04, came across the Rekenthaler Report. Written by Morningstar analyst John Rekenthaler, ’99, the reports weren’t the typical dull mutual-fund review. Rekenthaler vehemently argued—even ranted—for greater transparency for investors. He criticized fund companies for not disclosing their portfolio managers. When he disagreed with investing fads, he named names.

Kapoor was hooked on Rekenthaler’s depth of knowledge and candor. “When you’re in college, I suppose there is always a tendency toward irreverence,” he says now. “When I discovered Morningstar, the thing that struck me was that everyone called it as they saw it. They had a really strong independent streak. I thought, if this guy could say what’s on his mind so freely, then so could I.”

Two decades later, Kapoor now carries forward Morningstar’s tradition of independent investment research as its CEO, following the company’s founder and fellow Booth graduate Joe Mansueto, AB ’78, MBA ’80, who became executive chairman in 2017. The company, which is now on the cusp of growing past $1 billion in revenues, is the only place Kapoor has ever worked.

Morningstar has changed a lot since Kapoor joined the company right out of college. Yes, it still provides data on stocks, mutual funds, indexes, commodities, and many other investments—hundreds of thousands of options. It issues its proprietary, coveted star ratings, ranking mutual funds based on their risk-adjusted returns relative to similar funds. Its customers include financial advisers, asset management firms, retirement plan providers, and institutional and individual investors. From a business that Mansueto founded in 1984 in his Lincoln Park apartment, Morningstar has grown to approximately 5,230 employees worldwide, with operations in 26 countries outside the United States.

Morningstar also continues to offer added value for customers who have grown to expect high-quality, low-cost investment advice. It’s added coverage of private equity and venture capital with its recent acquisition of PitchBook. It’s launched its own mutual funds and has taken a significant stake in Sustainalytics to drive its efforts in environmental, social, and governance (ESG) research.

The new ideas are working. In 2017 Morningstar’s revenue increased 14 percent—the best performance in a decade—and its free cash flow rose almost 22 percent, positioning the company to benefit from acquisition opportunities.

Off to the Races

The day before Thanksgiving, Kapoor is sitting in an empty conference room, dressed casually in jeans and talking into a webcam. An employee occasionally wanders by, glancing through the floor-to-ceiling glass panels. (Rekenthaler isn’t around at the moment, but he still writes his Morningstar reports, educating readers and sometimes arguing with them.)

Even before Kapoor was combing the Rekenthaler Report for investment advice, he was scrutinizing horse-racing forms as a child in Kolkata, India. He was too young to attend the races—though his parents did once put him in a suit and sneak him into the Royal Calcutta Turf Club—but he loved studying race performances until patterns fell into place. “I was always comfortable looking at numbers and trying to make something logical of them, even if others weren’t making those connections,” he said.

He soon began testing his predictions in the stock market. An avid newspaper reader from early on, Kapoor at age 11 or 12 persuaded his father to subscribe to two IPOs that he thought would be good investments. Both were oversubscribed, so his father was able to participate in only one. “The one we got turned out to be a lousy investment, and the one we didn’t get turned out to be a really good investment,” Kapoor recalled.

After high school in India, Kapoor moved to the United States and attended Monmouth College, in western Illinois, where he studied economics and environmental policy. While he liked his accounting classes—“all those debits and credits balancing out always appealed to me,” he said—he also absorbed Monmouth’s liberal arts philosophy, with its focus on training students to solve complex problems. When Kapoor attended a recruiting fair, he realized he had an opportunity to merge his interests at Morningstar. He joined the company as a data analyst in 1997.

“I doubt that all those CDs we sold, laid end to end, would even come close to the miles I logged walking (sometimes sprinting) the halls of Morningstar.”

— Kunal Kapoor

“The critical thinking skills associated with being an analyst are invaluable,” he said. “It was an atmosphere where analysts openly debated and even challenged each other. Having that experience early in my career was helpful in my ability to lead later on.”

Gabriel Presler, ’05, worked closely as an analyst with Kapoor in those early years. “I remember him as given to practical jokes,” said Presler, now Morningstar’s director of sustainability strategy. “He’s very lively, and he likes to laugh a lot. It’s interesting that he’s been able to very gracefully make the jump to being a leader in an organization where he began in his early twenties. He’s been able to make a lasting impression as a new CEO.”

Working as an analyst also taught Kapoor to write concisely and persuasively, without the business jargon that can impede clear communication. This skill comes through in his first CEO letter to shareholders, where, in more than 4,000 words, he lays out the three financial metrics Morningstar uses to evaluate its business (revenue, operating income, free cash flow); outlines the secular trends driving the investment-advice industry (digitization, global regulation, low-cost investing); and praises the contributions of numerous team members.

Noting that he was celebrating his 20th anniversary at Morningstar the year he became CEO, Kapoor in the shareholder letter recalled his early days as an analyst, gathering information by phone and fax. At the time, Morningstar distributed its portfolio-analysis software on CD-ROM. (“Trust me, it was cutting edge,” Kapoor joked.) “I doubt that all those CDs we sold, laid end to end, would even come close to the miles I logged walking (sometimes sprinting) the halls of Morningstar, learning the business inside and out over the past two decades,” he wrote.

Never Trust the Hot Hand

As he was sprinting those halls, Kapoor also was dashing over to Gleacher Center after work to attend Booth’s Evening MBA Program. He joked that he chose Booth because it was a short walk—but admitted he was actually drawn to Booth’s renowned faculty and its focus on quantitative research. “At Morningstar there’s a long lineage of people who have gone to Booth and contributed meaningfully,” he said. “I see many examples of that, starting with Joe himself.”

At Booth Kapoor studied behavioral finance with Richard H. Thaler, Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics, who received the Nobel Prize in Economic Sciences in 2017. Today Thaler’s insights about irrational, emotional decision-making, and the predictable errors investors make, have been accepted in mainstream economics; Morningstar now has a behavioral finance unit that studies the obstacles people face in making effective financial decisions.

“I’ll sit down and watch a game and I’m saying, ‘Never give it to the hot hand! You want to give it to the person playing below average.’ Clearly, I’m not a fun person to watch a game with.”

— Kunal Kapoor

When Kapoor was a student, though, the ideas were groundbreaking, and Thaler’s research reinforced his desire to challenge conventional wisdom. Kapoor remembers Thaler describing the hot-hand fallacy, the mistaken belief that a person on a winning streak—such as a basketball player who has made a number of shots in a row—is more likely to continue succeeding. In fact, the hot hand is more likely to revert to the mean performance. (Thaler memorably explained this concept, with the help of actress and singer Selena Gomez, in the movie The Big Short.)

“I’ll sit down and watch a game with friends or my kids, and they’ll cheer for the hot hand to get the ball,” Kapoor said. “And I’m saying, ‘Never give it to the hot hand! You want to give it to the person playing below average.’ Clearly, I’m not a fun person to watch a game with.”

Kapoor attended Booth at a time when the scandalous collapse of two huge corporations, WorldCom and Enron, were frequent subjects of discussion in the classroom. WorldCom had become one of the largest long-distance phone companies in the United States by acquiring competitors, but when the tech bubble burst, executives turned to accounting fraud to maintain an appearance of growing profitability. Enron used so-called special-purpose entities to hide liabilities, inflating its reported profits. Both companies filed for bankruptcy-court protection in the early 2000s, and their CEOs received lengthy prison sentences.

Those case studies influenced Kapoor’s philosophy of letting numbers drive decision-making and bringing a healthy skepticism to acquisitions, rather than pursuing deals simply for the sake of demonstrating growth.

“Perhaps, on occasion, we get criticized for the way we manage our balance sheet,” Kapoor said. “We’re conservative. We like cash. We don’t have a lot of debt. Those are partly my personal leanings and how I was raised, but also it’s because my Booth education—particularly because I went through at the time of these high-profile corporate blowups—showed the downsides of not paying attention to data and of pursuing acquisitions that don’t make sense. One of the other things I took away was the constant urge for some companies to try to propel their stocks higher. People get so invested in the activities of talking to analysts and pumping up stock prices, even though we know that in the long run markets are efficient, as a Booth education will teach you.”

Building on Buffett’s Example

At Morningstar Kapoor doesn’t do quarterly investor calls. At the time of the company’s last two earnings releases, he was in Mumbai, India, for a conference and in Seattle for a product roadmap meeting—activities that he believes serve investors better than if he were to spend several days each quarter prepping for an earnings call and following up with analysts.

But that doesn’t mean Morningstar ignores investors; on the contrary, it is democratic, equally available to even the smallest shareholders. The company regularly answers written questions in 8-Ks filed with the Securities and Exchange Commission—and unlike with earnings calls restricted to Wall Street analysts, anyone can participate in these. Recent filings covered increased compensation costs for adding employees, the company’s way of working with financial advisers, and the other public companies Morningstar executives admire.

That question about role models provided an opportunity to talk about Berkshire Hathaway and its chairman, Warren Buffett, whose approach to investing deeply influenced Mansueto. “Joe certainly has taken some pages from Buffett’s playbook,” Kapoor said. “The tradition of putting the investor at the center, thinking about the long term, not getting too caught up in the swings of the day-to-day market. I have a very deep contrarian streak myself.”

That streak extends to Kapoor’s personal life, where he frequently persuades his family to choose vacation spots that seem out of favor, because they’ll be less crowded: Mexico City and Rio de Janeiro are two current favorites. And at Morningstar, Kapoor sees the recent market gyrations as a bargain-hunting opportunity. “‘Be greedy when others are fearful,’ to quote Buffett,” he said. “Even this year, as markets were going higher, we were getting more defensive, just because we’re students of history and valuation. It’s hard to get excited when the markets are up nonstop for 10 years. Now that it’s going down a bit, as everyone gets less excited, we’re getting more excited. In a downturn, I would be more interested in buying other businesses, because there’s less competition for them.”

Regardless of what happens next, Kapoor has experience assuaging anxious investors. His first high-profile role at Morningstar was serving as president and chief investment officer of Morningstar Investment Services. In 2007–08 that assignment was “like a visit to the dentist without Novocain,” Kapoor said. Stock markets were plummeting, wiping out businesses and sending stockholders fleeing. As Morningstar’s portfolios shrank, its fees declined. Competitors exited the business, but Mansueto encouraged Kapoor to stick with it, setting a foundation to benefit from the dramatic market upturn a few years later.

Now, the managed portfolios business is one of Morningstar’s fastest-growing areas, and Kapoor describes the role as one of his best jobs, despite the challenges. “You can just go hide under your desk and not pay attention and hope clients won’t find you,” he said. “But you need to be out in front of clients. A down market is a great time to ask yourself, ‘If the market turns, how am I going to succeed?’”

“He always took on a new challenge with enthusiasm. Almost more than anyone else at Morningstar today, he’s worked in all parts of the business.”

— Joe Mansueto

The next milestone in Kapoor’s career arrived when he became Morningstar’s director of international business strategy. The company—much smaller than it is today—was planning to grow overseas, potentially by making acquisitions. Kapoor was dispatched to evaluate businesses in Australia, Europe, and other regions where Morningstar was eager to expand. “Not only do you gain appreciation for the fact that work is different in different markets, but you also understand the blood and sweat it takes to start something from scratch,” he said. “In that job I felt a little more like an entrepreneur within the larger organization.”

Over two decades, Mansueto noticed that Kapoor was always ready to volunteer for assignments. “He always took on a new challenge with enthusiasm,” Mansueto said. “Almost more than anyone else at Morningstar today, he’s worked in all parts of the business.”

As Mansueto prepared to scale back his day-to-day responsibilities, he recommended Kapoor as his successor to the board. The directors suggested that the company first give Kapoor a broader set of responsibilities by promoting him to president. Once Kapoor proved himself in that role, the board reached a consensus that he was ready. “Our clients described it as the most drama-free transition they had ever seen,” Mansueto said.

Adapting to Investors’ Changing Preferences

The leadership transition at Morningstar comes at a time of technological and strategic change for businesses that provide investment data and advice. As more customers choose passive investment strategies and index funds, their tolerance for fees has declined. Automated “robo-advisers,” which use algorithms to provide financial advice, are challenging the business models of traditional human advisers. Morningstar itself has one of the largest robo-advisers in its Managed Retirement Accounts offering, which had more than $63 billion of assets under management as of the company’s 2018 third-quarter earnings.

“People are smarter about their options and about what they’re paying for, and they’re more demanding,” Kapoor said. “Those are all awesome developments. All of those years of being independent, standing for something, put us in a position for people to want to partner with us. We have more tools and horsepower to help them than ever before.”

Morningstar is responding to the trends with initiatives to lower expenses and simplify workloads for registered financial advisers, freeing them to spend more time on financial planning and building relationships with clients. In 2018 Morningstar began selling its own mutual funds: three stock funds, three bond funds, a total-return allocation fund that can hold both stocks and bonds, and an alternative-investments fund. They are available within Morningstar Managed Portfolios, which are marketed exclusively to financial advisers. “I think we’re very well aligned with advisers, because we’re both driven by a shared mission to serve the end investor,” said Kapoor, who once served as Morningstar’s director of mutual fund research. The goal of adding the proprietary mutual funds is to reduce costs by replacing the third-party funds that previously were used in the portfolios.

Another recent change that Kapoor championed was the acquisition of PitchBook, a data, research, and technology business that helps investors evaluate opportunities in private capital markets, which historically have been opaque and difficult to access. Morningstar, an early investor in PitchBook, had owned 20 percent of the company and agreed to purchase the remainder for $180 million in 2016, valuing PitchBook at $225 million. Kapoor had served on PitchBook’s board since 2012 and understood how the startup could help Morningstar offer a greater breadth of services.

“The trend toward more people putting money into private markets was underappreciated for a long time,” Kapoor said. But the most important reason for the deal, he added, is that “over the years, working with them, I just realized what a great team they were. That’s one of the things I’ve learned from Joe. When it comes to focusing on the things that matter, Joe often focuses on people.”

Kapoor’s confidence in the PitchBook team convinced Morningstar’s board of the strength of the deal. It’s paying off: in the third quarter of 2018 Morningstar highlighted PitchBook as a top-performing business and an area where it is adding employees. “Kunal was a big advocate for PitchBook because he knew them very well,” said Steve Kaplan, a Morningstar director, and Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance. “That is an acquisition that, so far, has performed well.”

So has Kapoor, whom Kaplan estimates he’s known for a decade, or maybe two, as he’s watched his rise through Morningstar. “Kunal was chosen as CEO because he was an effective leader and manager—strategic, creative, and execution-oriented,” Kaplan said. “And, he has had a strong start as CEO.”

Measure, Simplify, and Stand Your Ground

Kapoor and Mansueto meet in person about twice a month, but they are in touch almost daily. “Anything of importance that comes up, he knows about it,” Kapoor said. “If I need a second opinion, he’s the person I go to. He could easily be looking over my shoulder, but he never does. He has given the leadership team independence and backing to write Morningstar’s next chapter.”

For his part, Mansueto said he committed to giving Kapoor autonomy, checking in regularly but pointedly avoiding frequent visits to the office. “He’s not the kind of CEO who wants to distance himself from his predecessor,” Mansueto said. “I appreciate that he’s pulling me in, inviting my opinions, and that has made me respect and admire him all the more.”

Kapoor names many lessons he learned from Mansueto, among them the value of authenticity and accessibility. Kapoor regularly walks around Morningstar’s offices to get a sense of what’s happening throughout the company and made “walking meetings” commonplace. He encourages feedback from all employees, regardless of their position.

“Kunal is very open-minded, and he demands feedback, absolutely demands it,” said Catherine Odelbo, AB ’85, MBA ’00 (XP-69), who retired in 2018 as Morningstar’s executive vice president of corporate strategy. “It’s not just inviting it and hoping you don’t give it. He wants the team to be collaborative, but at the same time, he wants the team to air their issues.”

Mansueto also taught Kapoor to diligently eliminate complexity in both his professional and personal life. While Kapoor makes time for a handful of hobbies—reading, running, investing—and serves on the board of the Illinois Nature Conservancy, an environmental group, he also frequently turns down invitations.

“It’s very easy when you’re a public figure to feel compelled to participate in things that don’t add a lot of value,” he said. “Joe has helped me understand the importance of focusing on the two things that matter most: running this firm and being present for my family.”

Kapoor recognizes that he grew into his leadership style as he gained experience. “It’s different running a small team versus running a business versus running an entire company,” he said. “You have to understand how to scale your own self up.” As a junior manager, he said, he was very tactical about hiring. With maturity, he began to recognize the benefit of bringing in people who knew things he didn’t—and thinking about how new hires could position the company for success not just for the short term, but for the next five to 10 years.

One way that Kapoor wants to improve Morningstar’s hiring practices is to hold the company accountable for its stated commitment to diversity. Executives thought they were already living up to this principle, but in 2017 Morningstar examined the data, which told a different story. By the numbers the company is similar to the rest of the financial-services industry, with women and minority groups underrepresented. “Are we just hiring people in our own image?” Kapoor asked. “We’re starting to rethink how to do things. I think that hurt more here, because we perceived ourselves as different.”

Data revealed the problem, and Morningstar is looking to data to help solve it. In 2017 the company began measuring its workforce in terms of gender, ethnicity, and sexual orientation, sharing results internally with employees and on its corporate website. By establishing accountability for diversity goals, Kapoor hopes to get everyone at Morningstar thinking about potential solutions.

While Kapoor positions Morningstar for the future, he also vows to preserve the company’s core values of advocating for investors and maintaining independence. Occasionally, he will get a call from a CEO of a client complaining about an analyst’s criticism. It reminds Kapoor of his early days reading the Rekenthaler Report. Kapoor encourages dialogue, but he won’t pressure the analyst to change the opinion. “So the next person reading the column, as I was in college,” he said, “understands that we stand for something different.”

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