Our 2012 Stewardship Grades cover 26 mutual-fund companies, the same number as last year. Released on Oct. 10, this is the second annual update to our grades since launching them in June 2010.
The Stewardship Grade goes beyond the usual analysis of strategy, risk and return. It helps investors assess a fund based on the degree to which the fund's parent--the management company offering the fund--has its interests aligned with those of fund investors. The methodology also examines whether investors can expect their interests to be protected from potentially conflicting interests of the fund company.
As in past years, the Stewardship Grade represents our assessment of each fund company on the basis of four criteria:
- Corporate culture: our qualitative assessment of how much a fund company puts investors first, and seems poised for success over the long term. Factors that we view as important include, among other things, low manager turnover, lack of gimmicky product launches, and clear communication with investors through their web sites and regulatory filings.
- Manager incentives: whether managers are rewarded for producing strong long-term, risk-adjusted returns. Red flags in this category include compensation tied to asset growth, or rewards for short-term performance. We also consider manager co-investment, or how much, as a percentage of salary, the managers have personally invested in the fund family. This factor is based on evidence produced by our American counterparts, indicating positive correlations between co-investment and relative performance.
- Fees: a comparison both on an absolute and asset-weighted basis of each company’s management expense ratios for its funds, compared to competition within their respective distribution channels. Consideration is also given to the availability of both advisor-sold and direct-investor fund series, as well as any low-fee funds the company offers.
- Regulatory issues: review of any regulatory penalties or missteps of particular concern.
Some grades from last year have remained, while some have changed considerably. There are numerous reasons for these changes. First, each year’s stewardship grades do not rely on those from other years. The 2012 grades are meant to stand on their own, based on information provided by fund companies this year, complemented by our opinions formed over the years.
As well, our process is evolving over time. For example, this year we made a greater effort to compare fund companies’ fees only to others in similar distribution channels. Comparisons are now limited to either full-trailer or low- or no-trailer competition, based on the most prevalent offerings by each company. This represents a change from our first two years of Stewardship Grades, when our fee grades were based on a company’s standing across the entire mutual-fund universe.
Finally, we are pleased to be able to raise the bar each year, thanks to additional transparency by fund companies. As survey participants have become more accepting of our process, they have in most cases been more willing to reveal information critical to our grades. This disclosure has often reflected positively on the firms' grades.
The Stewardship Grade tries to capture some of the intangibles associated with making an investment decision. They're not intended to be viewed in isolation when making investment decisions. But when combined with other Morningstar analysis -- such as our Fund Analyst Reports and the Morningstar Analyst Rating -- the grades can help determine the difference between a great investment and one to avoid.
The following is a list of fund companies, in alphabetical order:
For complete Stewardship Grades information, please click here.
