How to use Stewardship Grades during your fund-selection process.
We're hearing that more and more financial planners are using Morningstar Stewardship Grades for funds to help them decide which offerings might be best for their clients.
The Stewardship Grades, which Morningstar launched two years ago, consider dozens of criteria to determine whether individual funds are likely to be quality fiduciaries when it comes to regulatory compliance, board independence, manager compensation, fees, and corporate culture. We weigh all of those factors and ultimately assign letter grades to funds. As is the case in school, A grades are best. (For more details on the methodology we use when assigning Stewardship Grades, click here.)
One of the quickest ways to home in on funds that stack up well both in terms of investment management and stewardship is to choose a Fund Analyst Pick with a Stewardship Grade of B or better. To be sure, we typically don't make a fund a pick unless it has a strong Stewardship Grade. Thus, nearly all of our Fund Analyst Picks meet the good-stewardship test.
But there are hundreds of other worthy offerings that also have strong Stewardship Grades. To zero in on some of these, we screened for funds with managers who have at least five years of experience as well as funds with five-year records in their peer groups' top half. We also sought funds with fees that are below their respective category averages and are open to new investors. Finally, we required funds in this screen to have a Stewardship Grade of B or better, and we limited our findings to one share class per fund.
The results were encouraging. About 200 funds passed the screen, and the group was well diversified in terms of investment style and asset class. Within this narrowed-down list of funds, there are some notable trends. First, well-regarded asset managers, including American Funds, Fidelity, and Vanguard, each had more than a dozen funds on the list, many of them in core asset classes. American Funds Capital World Growth & Income
In addition to these household-name fund families, several smaller funds from boutique shops also made the cut. Jensen
Another top-scoring offering is Oakmark International
Among moderate-allocation funds, which split their assets between stocks and bonds, Mairs & Power Balanced
Given all of the choices unearthed by this screening process, we think it's unnecessary to compromise on so-so stewards of capital when it comes to one's fund holdings. Investors who demand seasoned, talented managers of low-priced funds probably also want to invest in offerings that put long-term shareholders' best interests first--the key litmus test of the Stewardship Grade. We view that as a best-practice for investing.
Laura Pavlenko Lutton is a senior analyst with Morningstar.