Legend - Don Phillips

When Don Phillips was a youngster, his father gave him 100 shares of Templeton Growth Fund as a Christmas gift one year. That gift became the introduction to the world of mutual fund investing for a boy who eventually would become the first, and perhaps most renowned, professional analyst of mutual funds in the history of the industry.

“It was like magic,” he says of his first experience as an investor. “My father told me I owned a little bit of each of these companies, and Sir John Templeton was my personal money manager.”

Phillips had an inquisitive, Renaissance mind as a young man, and he was far from ready to become an investment professional. At college, he studied everything from 20th century Chinese literature to the Beat generation. “I ended up with two majors [economics and English] and about a half dozen minors,” he recalls. At the time, Phillips, now 49, wanted to become a professor of English literature and continue his fascination with investing on the side. He earned a master’s degree in English literature but soon recognized that, if he were to pursue his goal of teaching, he would have to curtail his passion for reading­ literature and instead spend most of his time reading literary criticism. Rather than cloister himself in a university library for the next five or so years, Phillips chose to pursue his thirst of knowledge in what he decided was a more productive fashion. The man who would become Morningstar’s president of fund research decided to flip his goals around: reading the great works of literature as an avocation and study and research the universe of investments as a career.

One day in 1986, he read a help-wanted ad placed by Joe Mansueto, who had recently founded Morningstar to ­provide investors with information on the burgeoning mutual­ fund market. The ad was for a mutual fund analyst. Phillips­ interviewed with Mansueto and, despite his lack of professional experience, he got the job. He thus became the world’s first real mutual fund analyst. Over the next two years, he read 100 books on investing, many of them on Chicago’s “El” during commutes to and from work.

For a man who still thrives on learning and analysis, it was the ideal job. “I got paid to pick up the phone and talk to some of the best investment minds in the country,” he explains.

Conversations with financial advisers and listening to the frustration they felt trying to explain to investors the differences in mutual fund equity classes led Phillips to create Morningstar’s signature mutual fund analysis tool, the Style Box (although he modestly points out that others had a hand in its creation).

Today, he remains driven to help investors better under­stand the complex market of mutual funds. “Wall Street puts up barriers,” he says. “We try to break down some of those barriers and make investing accessible to a wider audience.”

A large share of that audience resides in the retirement plan community. The defined contribution marketplace, says Phillips, represents the largest share of small investors seeking to put together a nest egg. So, in that sense, he believes he shares a mission with retirement plan advisers. “We can help people get to a certain amount of financial freedom so they follow their heart rather than their wallet,” Phillips says. “That’s what happened to me early in my life, and it can happen to others in retirement.”

Phillips concedes that the challenge facing the retirement plan community is a daunting one. “You’re trying to modify the behavior of a lot of people who aren’t engaged,” he explains.

Yet, Phillips believes Morningstar has given small-time investors like retirement plan investors a better shot in the mutual fund market than they formerly had. Twenty-five years ago, he says, “the industry was populated with bad funds and horrible practices.” By providing investors with copious data and enabling people to compare various funds, Morningstar has helped create a more investor-friendly environment and empowered retirement plan participants and others to make better-informed decisions, says Phillips. “The playing field has been tilted in favor of the investors,” he asserts. “That’s really gratifying.”

He also thinks recent trends—like target-date funds, automated plan features, the new focus on plan and participant outcomes, and behavioral finance concepts—are giving retirement plan advisers and sponsors beneficial tools to help participants make better use of their assets­. “Previously in the defined contribution world, you had good intentions but bad plans,” he suggests, citing in particular the way many sponsors encouraged employees to invest in company stock. “For the average employee, it was a terrible decision to put so much money in company stock,” Phillips observes. “Now plans have gotten so much smarter.” The current emphasis on broader diversification, target-date funds, and automatic enrollment and escalation “are really smart, well-intended products,” he says. “I think it’s a terrific trend.”

Phillips believes those industry trends will continue to play a powerful role in helping retirement plan participants prepare. He also foresees the volatility of the market demanding alternative strategies, including less reliance on fixed-income funds as a ballast to keep income-earning funds from tipping the investment ship too far to one side. Phillips does not think fixed income, long the bedrock of many 401(k) portfolios, will provide investors with the steady, positive income in the future that it has in the past.

As far as his own immediate­ future, the president of fund research for Morningstar does not anticipate any significant movement. “I enjoy being part of Morningstar and believe in its mission,” he relates. “We sit on top of these amazing data­bases, and the ability to extract from them is a daunting but fun task. It’s fun when you’re learning, and we’re learning about new funds and new tools and, if it’s fun for us, it’ll be fun for our readers.”

The work remains fresh and exciting for Phillips, in part because it has changed so much during his 25 years at the firm. Initially, the goal was to glean as much information as he could get about mutual funds and pass it on to readers. Since the advent of the Internet, there is a glut of information, and the objective is to parse through it and filter out all the noise and focus on truly valuable data.

What has made him such a success at Morningstar? “I think it’s pretty simple,” Phillips responds. “You have to care about the subject matter, be passionate about it, and put yourself in the line of fire. Be part of the dialogue and listen to what others have to say. If you do that listening, you can achieve a lot.” —Louis Berney 

The “Legend” 

Phillips has more than made his mark on the defined contribution system. For years, a retirement plan investment lineup was not complete unless it had a fund representing every sector of Phillip’s brainchild, the Morningstar Style Box (frequently accompanied by a review of the Morningstar star rating). Further, in the retirement plan advisory world, the quarterly reports delivered throughout the year are frequently filled with pages of Morningstar reviews, ratings, and analysis.

Don Phillips is President of Fund Research for Morningstar, overseeing research on mutual funds, exchange-traded funds, and alternative investments. He also has served on the company’s board of directors since August 1999. Phillips joined Morningstar in 1986 as the company’s first mutual fund analyst and soon became editor of its flagship publication, Morningstar Mutual Funds, establishing the editorial voice for which the company is best known. Phillips helped to develop the Morningstar Style Box, the Morningstar Rating, and other distinctive proprietary Morningstar innovations that have become industry standards. Phillips holds a bachelor’s degree from the University of Texas and a master’s degree from the University of Chicago.