Twenty-five years ago, designing a portfolio of mutual funds was a bit like playing Pin the Tail on the Donkey. There was no way to know for sure if you were hitting your target investments with any real precision. Was a domestic stock fund really a domestic stock fund, or did it sometimes veer off into foreign fixed income? Did a large-cap value offering sometimes look more like a small-cap growth fund?

That was the world Morningstar found itself entering in 1984, when Joe Mansueto launched the research firm in Chicago. The first analyst that he hired two years later was Don Phillips, who had recently acquired a Master's degree in English and had a knack for communicating complex topics in an accessible way. Phillips was also enamored by mutual funds, having purchased his first shares as a 13-year-old (in Templeton funds).

Phillips, now 48, and a handful of analysts were charged with combing through the holdings of mutual funds, talking to managers and then telling readers what they thought in a print publication called Morningstar Mutual Funds.

"It was a joy to read," says Richard Bregman, chief executive officer of MJB Asset Management of New York. In the early 1990s, Bregman worked as a financial planner with Chemical Bank building portfolios of mutual funds for clients. "For the first time you could actually compare funds. You didn't have to rely on marketing literature."

The 401(k) retirement plan was just taking off, as was the long, furious bull market. Suddenly, ordinary people were entering the equity market through mutual funds and they needed advice.

LOOKING TO ADVISORS

The world of financial planning was changing too. Advisors were moving toward open-architecture platforms where they were no longer beholden to just one fund family, but instead could build portfolios from best-of-breed offerings by different firms.

Very quickly, Morningstar developed a symbiotic relationship with the profession.

"We were trying to come up with products for the individual investor, but we found this whole vein of financial advisors, which was probably a much better fit," Phillips says.

"Don's embrace of the advisor forced the [mutual fund] portfolio manager to embrace the advisor," says Ross Levin, founding principal of Accredited Investors in Edina, Minn. "Yes, there were people like Jean-Marie Eveillard who were always available, but now portfolio managers opened up a lot more."

Phillips became a regular on the advisor conference circuit in the early 1990s, where he would buttonhole participants between sessions to have a conversation about some aspect of fund analysis. One of the Morningstar's iconic brands was the direct result of Phillips' conversations with advisors who complained that they had difficulty explaining to their clients why they would need to invest in more than one domestic stock fund. It was impossible to show how different funds complemented each other and where the overlaps were.

STYLE BOXES AND STARS

Now managing director, Phillips has held just about every possible job at Morningstar during his 24 years, including that of CEO briefly in the mid-1990s. But it is the style boxes, first published in 1992, that he will always be known for.

By poring over each holding in various funds, Morningstar was able to sort them into that famous matrix: value, blend, growth on the X axis; large, medium and small-cap on the Y. Using the style box as shorthand, an investor could then easily compare funds within the same category.

"You had these funds with names like Magellan or Windsor," Phillips says. "They were poetic but they didn't tell you much about how the fund invested."

Funds were routinely miscategorized because their names were misleading. Sometimes that was by design. "We used to say that the easiest way to be No. 1 in your category was to be miscategorized," Phillips says. "You'd see funds being renamed and repositioned so that the rating would be more favorable to them."

More than just simply bringing order to fund names, Phillips says, the style boxes wrested control away from fund companies about the role a particular offering could play in a portfolio.

What Phillips calls a "descriptive" tool soon became proscriptive, however. One of the worst insults that could be hurled at a manager in the 1990s was to be accused of so-called style drift.

"I never in a million years imagined there would be style police who protected the sacred ground between blend and value," Phillips says today.

Morningstar's coveted star system also courted controversy. Developed by Mansueto in 1985, prior to Phillips' arrival, the stars are based on past performance. But the stars were quickly interpreted by investors and fund companies alike as Morningstar's stamp of approval (four or five stars) or conversely its thumbs-down (one or two). "We never ran an ad saying follow the stars to riches," Phillips maintains. "The stars are not an aptitude test, they're an achievement test."