In this broad-ranging interview, Don discusses his path from a paper boy investor in Templeton Growth Fund to a job analyzing mutual funds at Chicago startup Morningstar in the mid-1980s. He also opines on the industry's evolution from the opaque, sales-driven culture that he encountered 30-plus years ago to its current emphasis on transparency and very low costs.
• The paper-boy years: Don’s early investing influences (1:40) • The magic of mutual funds: “Sir John Templeton is my personal money manager” (2:45) • “I had gotten married”: How an aspiring literature professor became Morningstar’s first mutual-fund analyst (4:00) Building Fund Research • “Dark days”: What it was like in the fund industry of the 1980s (5:20) • Democratizing data: When the freshest fund stats were nine months old (7:10) • Getting them to answer the phone: How Morningstar’s fund database was built (8:30) • “Putnam wouldn’t talk to us”: How pull demand (i.e., a reporter’s background notes) changed that (9:45) • “My first job was to read 777 mutual fund prospectuses” (11:20) • Don’s “el-train” indoctrination to investing (12:10) • “Not interested (click)”: Opening doors in the early days (13:00) • “It’s who you surround yourself with”: How to build a team (14:20) • “Their funds are better than some, not as good as others…”: Morningstar’s approach to serving the financial journalists that called on it (16:10) • “They found us”: Connecting with our audiences, finding our voice (17:00) Analyzing Funds, Finding Our Voice • “Let’s add a gold fund”: Behind the development of the Morningstar Style Box (18:00) • “You had to be an insider to know that Windsor was a value fund and Janus was a growth fund”: Turning the tables on fund-company marketers (19:05) • “Lies, Damn Lies, and Fund Advertisements”: Facing down a fund company’s libel suit (21:45) Achieving Better Outcomes • Low-cost trend means “better and better deals for the investor” but beware unintended consequences (23:00) • It’s not the only thing: “You can have a low-cost portfolio that’s wildly inappropriate for an investor that leads to a disastrous outcome” (25:00) • “We’re all in the behavior-modification business”: Helping people chart a path to their goals (26:40) • “I would have closed the (Vanguard) Growth Index Fund”: How the experience you create for investors determines your success in the fund industry (36:30) • Avoiding the “arms-dealer mentality”: How fund companies can ensure investors have better experiences (39:30) • “The best thing I can do for my clients…is to go on vacation”: On the wisdom of investing without tinkering, and the hazards of information overload (41:00) Active vs. Passive Investing (and Remembering Jack Bogle) • “Passive is getting more active every day”: Finding ways to evaluate algorithms and indexes (28:00) • “Jack is very much with us today”: Remembering Jack Bogle and his impact on investors and Morningstar (29:10) • “You can’t get away from arithmetic”: If cost is the enemy then investors probably aren’t overdoing it in fleeing active funds for passive (31:30) • “To me it’s not an either/or battle”: Don on the mix of active and passive funds in his personal portfolio (32:50) • Personalization as the new active: “The art of investing is matching investment to investor” (35:00) The Future of Funds, Advice, and Research • Imagining the fund industry in 10 years (and its similarity to the music business’s radical transformation): “It may be that the mutual fund is like the old LP” (42:20) • “Investors have a right to know” the ESG consequences of where their money is going (45:00) • “Digitizing process”: Using big data to assess the investment process (46:10) • “When you’re reading literature, you’re seeing the world through different eyes”: The importance of diversity to decision-making and life (47:30) • “Put it on a little piece of paper and put it in a drawer”: How investment committees can avoid knee-jerk reactions and make better decisions (48:30) • “The art of investing is the match between investment and investor”: New frontiers in fund research (52:00) • “There is fee pressure, but there’s also a lot of satisfaction”: How the advice industry evolves amid automation and declining prices (56:30) • “Fiduciary standards in general are hard to enact”: The intentions are good, but beware bureaucracy, red tape, and unintended consequences (58:30) References • Don Phillips, recipient of 2016 Matthew R. McArthur Industry Pioneer Award https://investmentsandwealth.org/news-room/2016/imca-awards-recognize-outstanding-achievement • Sir John Templeton https://www.templeton.org/about/sir-john • Wall Street Week https://www.youtube.com/watch?v=3ADn7V_l4Ws • Joe Mansueto https://www.morningstar.com/company/about-us/joe • Don’s love of the liberal arts, literature, and business https://grahamschool.uchicago.edu/news/how-liberal-arts-thrive-business-world • Don Phillips, “Reflections on Fund Management, Five Lessons from 25 Years” http://www.imas.org.sg/uploads/media/2012/10/31/519_100907_Reflections_on_Fund_Management_Five_Lessons_from_25_Years_Sep11.pdf • The Wiesenberger Books https://www.ifa.com/articles/arthur_wiesenberger_morningstar/ • Morningstar Mutual Fund Sourcebook https://images.app.goo.gl/LgzRCxK9Q3Bu77WC9 • Charles Royce https://www.roycefunds.com/people/chuck-royce • The Morningstar Style Box http://www.morningstar.com/InvGlossary/morningstar_style_box.aspx • Vanguard Windsor Fund https://www.morningstar.com/funds/xnas/vwndx/quote.html • Court of Appeal, Second District, Division 7, California.; Morningstar, Inc., and Don Phillips, Petitioners, v. SUPERIOR COURT of the State of California, for the County of Los Angeles, Respondent. PILGRIM GROUP, INC., Real Party In Interest; No. B075691. https://caselaw.findlaw.com/ca-court-of-appeal/1769980.html • ESG Investing https://www.morningstar.com/company/esg-investing • Morningtar Blog: Sustainable Investing https://www.morningstar.com/blog/tag/sustainableinvesting • Janus Funds, Super Bowl XXXI (1997), “Eyes” ad https://adage.com/videos/janus-funds-eyes/1024 • “The Evolution of Robo-Advisors”, Morningstar blog (July 2018) https://www.morningstar.com/blog/2018/07/11/robo-advisors.html • “The Importance of Asset Allocation” by Roger G. Ibbotson, Financial Analysts Journal, May/June 2010 https://www.cfapubs.org/doi/abs/10.2469/faj.v66.n2.4 • “Why Diversity and Inclusion Matter to Investors” by Dan Lefkovitz, Morningstar blog, Dec. 18, 2018 https://www.morningstar.com/blog/2018/12/18/diversity-inclusion.html • Cathy Odelbo https://www.morningstar.com/company/about-us/catherine • John Rekenthaler https://www.morningstar.com/articles/archive/208/articles-by-john-rekenthaler.html • Lori Lucas https://www.ebri.org/about/staff/lori-lucas-cfa • A Global Guide to Strategic-beta Exchange-Traded Products https://www.morningstar.com/lp/global-guide-to-strategic-beta • “Strategic-Beta Exchange-Traded Products Continue to Grow, but Show Signs of Maturity” by Ben Johnson, Morningstar blog, Mar. 27, 2019 https://www.morningstar.com/blog/2019/03/27/strategic-beta-etp.html • “Vanguard Founder Jack Bogle Passes Away” by Dan Culloton and Alec Lucas, Morningstar.com https://www.morningstar.com/articles/908054/vanguard-founder-jack-bogle-passes-away.html • Invesco QQQ Trust (which tracks the Nasdaq 100 Index) https://www.morningstar.com/etfs/xnas/qqq/quote.html • Jack Brennan, former Vanguard CEO [to find] https://en.wikipedia.org/wiki/John_J._Brennan_(businessman) • Sheryl Garrett https://garrettplanningnetwork.com/about/team