Fund Investing

Lower fees, transparency set finalists apart.
By Christopher Davis | 25/01/17

"To stand still is to fall behind" the great American author Mark Twain (reputedly) said. Put another way, those that don't up their game will find themselves surpassed by rivals. That's especially true for money managers, who face ever-tougher competition in recognizing and retaining talent, identifying and sustaining their investment edge, demonstrating alignment with investors, and providing a good value proposition. What constitutes best practice in each of these becomes standard practice over time.

About the Author
Christopher Davis is Director of Morningstar Research at Morningstar Canada. In this role, he oversees Morningstar’s Canada active fund research analyst team and sits on the Canadian Morningstar Analyst Ratings Committee. He is Morningstar Canada's lead analyst for the Fidelity and Sentry fund families. He also represents Morningstar on the Canadian Investment Funds Standards Committee. Prior to assuming his current role in 2012, he was a senior fund analyst in Morningstar's U.S. office. During his tenure, he led Morningstar's coverage of Fidelity Investments and was the editor of the Fidelity Funds Newsletter. He also served as the lead analyst on several other asset managers including the Baron, FPA, Columbia Acorn, Ariel, and T. Rowe Price fund familes, as well as for the health-care category. His specialties included behavioral finance, income oriented, and tax-managed fund. He also oversaw Morningstar's target-date fund coverage of the Fidelity and TIAA-CREF series. Davis joined Morningstar in 1999 as a data analyst and became a fund analyst in 2000. Davis holds a bachelor’s degree in economics and political science from the University of Illinois Urbana-Champaign.

Morningstar recognizes industry-leading practices with its Steward of the Year Award. To be eligible, a fund company must have a history of fundholder-friendly behaviour: We only consider those with a Positive Parent rating. (The Parent Rating is a component of Morningstar's qualitative Fund Analyst Rating. In Canada, Morningstar rates approximately two dozen parent organizations.)

From this list of eligible candidates, we winnowed the field by focusing on firms that distinguished themselves on the stewardship front in 2016. Investors shouldn't take the lack of a nomination as a sign a fund company has slipped. It's just that our two finalists highlight practices their competitors would do well to emulate.

Finalist: RBC Global Asset Management

As the country's largest asset manager, RBC GAM probably could rest on its laurels for awhile. By and large, it has not. Long the industry cost leader, RBC sliced expenses broadly across 85 funds in 2016. Amid intensifying fee competition, the cuts, which on average shaved off 0.2 percentage points from fund management-expense ratios, maintained RBC's cost advantage. Our nomination recognizes RBC for passing along benefits of growing economies of scale to fund holders.

Our nomination also acknowledges the well-managed re-opening of PH&N High Yield Bond orchestrated by its Phillips, Hager & North subsidiary. In early 2016, the fund briefly took in new money to allow manager Hanif Mamdani to add to his stake in depressed energy and basic materials issuers and closed shortly after reaching its asset target -- a decision that benefited fund holders handsomely. RBC has not always managed capacity so well -- domestic equity funds like RBC Canadian Dividend are saddled with bloated asset bases -- but we credit it for doing so in this case.

Finalist: Steadyhand Investments

Steadyhand remains the poster child of a good steward. The firm continues to stand out for its transparency, consistent approach to investment management and investor-first orientation. Our nomination is a nod to its efforts in minimizing the behaviour gap -- the oft-large difference between what a fund and its unitholders earn. Investor returns often fall short because of counterproductive behaviour. The political turmoil of 2016 offered such opportunities, but its calm, accessibly-written commentary helped investors maintain their sanity, improving the odds fund holders will stick with their investments over the long haul.

Similarly, when it changed subadvisors at its small-cap fund, Steadyhand clearly outlined its rationale for the change and described differences in approach of the new subadvisor in direct communication with clients and on its website -- a nice change of pace from the formulaic press releases that typically announce manager changes. Such candor shouldn't be uncommon: When fund holders put their capital at risk, they deserve to know who's watching over it and why.

Steadyhand also deserves kudos for disclosing the extent of its employees' investments in the firm's funds. It's not that co-investment is unusual elsewhere, but with 83% of their financial assets invested in the firm's funds on average, Steadyhand employees enjoy the same experience as its clients. It’s worth noting Steadyhand chooses subadvisors to manage its funds, and while the firm showed us how these subadvisors invest heavily in the strategies they oversee, the extent of these managers' co-investment isn't publicly disclosed. Steadyhand employees don't make investment decisions within the funds, though the firm chooses the subadvisors and sets fees. The employees' heavy co-investment aligns these decisions with those of fund holders.

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