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It can take time for organizations to change—
especially big ones. But as Morningstar analysts have
been conducting regular reviews of some of the
largest mutual fund families during the past year,
they’ve noted changes at some firms that have led
to an improvement or deterioration in parts of
their Stewardship Grades, some of which have meant
a change to their overall stewardship assessment.
Evolution of Stewardship
Longtime
FundInvestor
readers and other mutual
fund investors will remember how unsettling and
costly the market-timing and late-trading scandals
were in the early
2000
s. Morningstar felt it, too, and
our stewardship efforts were born more than a
decade ago.
Over time, the methodology has evolved—whereas
it first focused on individual funds, for example, it
has since mid-
2011
concentrated on the firm
level, given how critical that corporate culture is
to stewardship. In a nutshell, Morningstar evalu-
ates five areas to determine a firm’s Stewardship
Grade: Corporate Culture, Fund Board Quality,
Manager Incentives, Fees, and Regulatory History.
Industry Snapshot
It’s important to have some context surrounding the
firm-level data that analysts use in making their
judgments. Table
1
gives investors a glimpse into
the industry and helps build that context.
Note that companies with greater manager-retention
rates have generally produced better results. But
the differences in retention rates can be slight—a
great majority of firms boast manager-retention
rates greater than
90%
. In fact, the averages are
around
92%
for both the one-year and five-year time
periods. Thus, it’s important for investors to further
investigate retention rates below
90%
. Is there a
cultural deficiency that has made it difficult for the
fund company to attract, nurture, and retain invest-
ment talent, or did a recent merger temporarily upset
retention figures?
Unfortunately, the industry numbers on manager
investment aren’t as strong. On average, less
than half of a firm’s assets are in funds in which at
least one manager has more than
$1
million invested,
and there are simply too many funds in which its
manager doesn’t invest at all. That’s too bad for fund-
holders, as Morningstar research has shown that
funds with high manager coinvestment have produced
better results, particularly on a risk-adjusted basis.
Among the top
20
, this advantage is shown through
American Funds’, T. Rowe Price’s, and Dodge
&
Cox’s strong success rates. (T. Rowe Price’s manager
coinvestment jumps when its
401
(k) investments,
which are collective investment trusts that mirror its
mutual funds, are included.)
One firm that goes against the grain here is Vanguard.
Its manager coinvestment overall is fairly weak on
the surface, but its index fund managers tend to be
named on multiple index funds. When those invest-
ments are combined, its manager coinvestment looks
better. Plus, the vast majority of Vanguard’s actively
managed, subadvised funds have high levels of
manager investment.
Fidelity Changes Approach, Gets an Upgrade
Morningstar has seen something of a transformation
on the equity side of Fidelity. The firm has long been
regarded not only for its equity-research prowess, but
also for its intensity and competitiveness. These
latter attributes had a couple of undesirable effects.
One, they created a number of star managers at
the firm. While this isn’t a bad thing in and of itself,
at Fidelity it meant that some of its research may
have benefited a more limited group of funds rather
than the organization overall. Also, key-man risk
was abundant.
Two, there was a lot of turnover among the funds, as
Fidelity tested new managers on its smaller, noncore
funds to see if they could produce results before
either promoting them to more-diversified offerings
Stewardship Roundup
Morningstar Research
|
Bridget B. Hughes