According to a Wall Street Journal article reported last week, Morningstar is experiencing severe difficulties in its equity research arm, despite a big win at Merrill Lynch.
The WSJ reported that an anonymous letter signed by “Morningstar equity analysts” was recently sent to William H. Pauley III, the federal judge overseeing the Global Research Settlement. The letter warned that Morningstar was facing a resource crunch as the firm tried to increase its research coverage from 570 companies to 1,380 by the end of July in order to meet the contract recently signed between Merrill Lynch’s independent research consultant and Morningstar.
In order to fulfill the contract with Merrill Lynch, the anonymous letter contends that Morningstar analysts are having to double their research coverage from 25 stocks to as many as 50 stocks. The letter argues that analysts are being severely underpaid for the additional workload.
Of course, Morningstar management explains that it has everything under control and that the firm is rapidly hiring new analysts to insure it has sufficient research resources to meet the contract. Morningstar also notes that by the end of the year, all Morningstar analysts should be back down to a normal coverage load of 20 to 25 stocks.
The article also intimated that the consultant for Goldman Sachs is also strongly considering hiring Morningstar as one of the independent research providers it brings on board to meet the terms of the Global Research Settlement.
It is unclear if this anonymous letter accurately reflects the quality risks associated with the increased coverage requirements Morningstar (and Merrill Lynch) is facing with the recently announced contract between the two. It is highly likely that such a letter could have been written by some disgruntled current (or former) employee. This situation, however, does reveal the pressure faced by many research providers and independent consultants as a result of the implicit desire to include fundamental research coverage for many (if not all) of the stocks covered by the 10 investment banks involved in the research settlement.