One holds steady, one improves, and one takes a dive.
Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.
With most portfolios still deep in the red over the past year, many investors may not view their funds' Stewardship Grades as a high priority. But whether investments are up or down, you still want to know if your fund is working for you.
We've recently updated Morningstar's Stewardship Grades for the funds that we closely follow at three well-known fund companies. In one case, we've noted some improvements in the way that the funds are caring for shareholders' capital, and in another case, we've been pleased to see the firm stay focused on serving shareholders well even as the firm's ownership has been in flux. Finally, we'll point to one firm whose stewardship seems to be deteriorating instead of improving.
When determining a fund's Stewardship Grade, we analyze five areas: corporate culture, fund board quality, fund manager incentives, fees, and regulatory history. Funds that earn high Stewardship Grades are backed by corporate cultures that are focused on serving shareholders well--not securing more sales of fund shares. These "A" stewards also have independent fund boards that do well for shareholders by negotiating lower fees, overseeing sensible funds, and closing funds that are growing too large to manage well. Funds that earn top grades for manager incentives have fund skippers that are paid to deliver strong long-term performance and also have made big investments in the funds they run. Finally, funds that get the best scores for fees and regulatory history have low expense ratios and no run-ins with industry regulators in recent years.
Holding Their Own
Just this week, we updated the Stewardship Grades for the Neuberger Berman funds. Funds in this family faced a crisis in September 2008 when their owner, Lehman Brothers, declared bankruptcy and bidders lined up to take control of the castoff asset-management firm. We had some concerns about whether Neuberger's new owner would preserve its distinct investor-focused culture, as Lehman had by largely leaving Neuberger alone. But we think that the funds are in good hands because nearly half of the firm is now owned by insiders who certainly have financial incentives to stick around and preserve the culture that's served investors well in the past. (The other half of the firm is still owned by Lehman Brothers, which is in the hands of the bankruptcy court.)
One casualty of the deal was Peter Sundman, CEO and president of Neuberger's mutual fund business, who left shortly after the buyout was announced, but otherwise, the management ranks have been stable. They have not strayed from their proven investment style, and the fund company's limited roster of funds plays to the managers' strengths. Thus, we've maintained the funds' B grade for the corporate-culture section of the Stewardship Grades.
For the Neuberger funds to improve their Stewardship Grades from here, we'd like the firm to revise its pay package for fund managers so that they're paid to deliver strong long-term performance for shareholders. As it stands now, the firm's description of its pay plan in the funds' Statement of Additional Information, a document filed annually with the Securities and Exchange Commission, is so vague that we can't tell whether managers are getting paid primarily for generating peer-beating returns, or whether other factors--like working with Neuberger's marketing team or helping build a bigger franchise--are bigger factors when setting the managers' annual bonus.
Movin' on Up
One fund family with improving Stewardship Grades is Invesco AIM. The AIM funds' scores have moved higher as its corporate culture has grown more investor-focused. The firm was troubled following dismal fund performance and a market-timing scandal in the early 2000s, and we've been looking for signs that the firm had shed its sales-focused, momentum-chasing culture.