Ruth Richardson draws lines in Morningstar sand

By Chris Hutching

Friday 30th November 2001

Ruth Richardson

Ruth Richardson said yesterday she "drew two lines in the sand" before resigning from her directorship of investment funds research company Morningstar Australia last weekend.

The first line in the sand was her support for the continued leadership of Morningstar Australia by chief executive Graham Rich, who was rolled in a boardroom coup by the representatives of the US Morningstar parent company last week.

Her second line in the sand was her concern about corporate governance of Morningstar Australia over several issues. One of them was her view that, when a dispute arose between Mr Rich and the US directors and it went to court, the company should have taken independent legal advice rather than using lawyers engaged by the US directors.

There was also a problem for Miss Richardson in the attitude of the US directors who she said seemed to consider the board of Morningstar Australia as little more than a management committee. There was no appreciation that the role of chairman and chief executive should be separate, a situation that Miss Richardson said was common for many US firms.

"There was a casual, almost cavalier attitude to corporate governance and it was clear where my responsibility lay. What distresses me is that the company has a good foothold in the industry under Graham's leadership and with Morningstar's strength it had strong potential. It will give me no joy to be proved right but I don't think Morningstar will retain that foothold without Graham."

Mr Rich lost his job as chief executive after a series of legal actions in the New South Wales Supreme Court last week where the US directors of Morningstar Australia argued that performance targets had not been met and the Australasian company - set up as a joint venture in 1999 with staff of 60 and turnover believed to be about $5 million - was close to insolvency.

There was also an argument about a shareholding arrangement. Mr Rich remains a director and 40% shareholder but accepts he is unlikely to recover his job. He said he would now sue Morningstar and was embarking on other ventures, possibly through his company, Fiduciary.

"There's no restraint of trade on me," he said yesterday.

Joe Mansueto, chairman and chief executive office of Morningstar Inc in Chicago, said progress in Australia had been disappointing. The Morningstar Australia board has now appointed Bevin Desmond,
president of Morningstar's international division, and Tao Huang, chief operating officer of Morningstar, as joint managing directors until a permanent CEO is found for the operations.

Meanwhile, the Australasian managing director of Frank Russell Co, Alan Schoenheimer, has warned investors and financial planners that the star rating of a fund appears to have only a slight correlation with its past performance and no clear correlation with its future performance and should not be the sole basis for investment decision-making.

Speaking at the Australian financial planners conference in Brisbane last Saturday, Mr Schoenheimer presented his company's own rating of the Morningstar's ratings.

He said unlike in the US, star ratings in Australasia were unlikely to result in a flow of money in or out of a managed fund and such inflows seemed reliant on the distribution networks of financial service companies.

"If you buy a five-star-ranked fund today, don't bet on it delivering you a five-star return in a year's time," he said.

"For example, in order to place in the top 10% of a fund category - earning a five-star rating - a fund manager may take on high levels of risk. That risk is often inappropriate for many investors and may land the fund among the bottom performers the following year."

Instead, investors should pay more attention to the key staff managing the portfolio within their funds.

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