Morningstar Publishes Findings from Latest Study of Asset Managers' Fund Stewardship Practices

Chicago, IL - 20 March 2014

New research from Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, reinforces that asset managers with good fund stewardship practices have produced better outcomes for investors. Morningstar analysts examined stewardship practices alongside the firms' success ratios, which Morningstar defines as the percentage of a firm's funds that have survived and outperformed the median fund in a respective category, considering the funds' total returns as well as risk-adjusted returns.

Specifically, the analysts evaluated four Morningstar firm-level data points that measure stewardship--Average Manager Tenure, Manager Retention Rates, Manager Ownership of Fund Shares, and Morningstar Fee Level--which Morningstar calculates for more than 750 U.S. asset managers. Morningstar then assessed whether firms with positive stewardship data had stronger success ratios. The analysts also evaluated this data among the 179 firms that receive Morningstar's qualitative stewardship ratings. Overall, Morningstar found that higher manager retention and tenure, higher manager ownership in funds, and lower fees coincide with more positive Morningstar stewardship ratings and superior success ratios.

"We undertook this study to determine whether our belief that firms with good stewardship practices provide better investor outcomes was evident, and the results strongly support that conclusion," Bridget Hughes, Morningstar's associate director of fund research and lead author of the study, said. "Our proprietary, firm-level data points measure whether asset managers are aligning their interests with their funds' shareholders, in terms of manager tenure and retention, manager ownership in funds, and fees. In turn, these data points inform our assessment of firm stewardship, expressed through our Stewardship Grades and the Parent component of our Analyst Ratings for the funds and fund companies we cover."

As of Jan. 31, 2014, analysts assigned four "A" Morningstar® Stewardship Grades(SM), six "B" grades, and 10 "C" grades to the largest U.S. fund firms, which represent more than two-thirds of the industry's total U.S. mutual fund assets. The four firms that earn an "A" are American Funds, Dodge & Cox, T. Rowe Price, and Vanguard.

Key findings of the study include:

  • Fund firms with average manager tenure of more than 15 years exhibit higher success ratios, or the percentage of a firm's funds that have survived and outperformed the median fund in a respective category, than fund firms with average manager tenures of zero to three years.
  • Fund firms with a 95 to 100 percent five-year manager retention rate have achieved the strongest average success ratios. Morningstar's manager retention rate measures what percentage of a firm's portfolio managers have stayed at the company for a specific period of time.
  • Firms with 80 to 100 percent of their fund assets where at least one manager has more than $1 million invested report the best success ratios, on average. Firms with less than 20 percent of their fund assets where at least one manager has more than $1 million invested tend to have the worst success ratios.
  • Firms with lower average fee levels report better success ratios over three-, five-, and 10-year periods.
  • A correlation matrix, which measures the existence of two characteristics together but doesn't necessarily indicate causation, suggests that the data points featured in the study are largely independent measures of stewardship and together help identify strong caretakers of capital.

Morningstar assigns a Morningstar Analyst Rating(TM) to more than 3,500 funds globally, evaluating five key pillars for each fund: People, Process, Parent, Performance, and Price. The Parent pillar rating of Positive, Neutral, or Negative represents Morningstar's qualitative view of the firm's stewardship practices. Morningstar evaluates 179 U.S. parent fund companies: 43 percent of those firms earn Positive Parent pillar ratings, 46 percent earn Neutral Parent pillar ratings, and 11 percent earn Negative Parent pillar ratings, as of Dec. 31, 2013. All figures are as of Dec. 31, 2013, unless otherwise noted.

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