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Screening for Strong Funds That Are Good Stewards

How to use Stewardship Grades during your fund-selection process.

Laura Pavlenko Lutton, 09/05/2006

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 CWGIX, Fidelity Intermediate Bond FTHRX, and Vanguard Growth Equity VGEQX are among our favorites from these shops.

In addition to these household-name fund families, several smaller funds from boutique shops also made the cut. Jensen JENSX, a nimble $2 billion large-growth fund with a disciplined investment strategy, is one on the list. The fund is run by a team of investors, some of whom have helped managed the fund for more than a decade. As for Jensen's Stewardship Grade, it earns an A, owing to its independent board of directors and fund's clear track record of putting fundholders' long-term interests first.

Another top-scoring offering is Oakmark International OAKIX, a foreign large-value fund run by David Herro since 1992. There's a little room for improvement on this fund's stewardship front, particularly with regard to expenses, but the fund's B grade is very respectable. Not only does Oakmark's advisor, Harris Associates, have an investment-centric culture, but the board of directors overseeing the offering has become more independent in recent years.

Among moderate-allocation funds, which split their assets between stocks and bonds, Mairs & Power Balanced MAPOX passed the screen. Manager Bill Frels has run the fund since 1992 with stand-out results, and the fund's B Stewardship Grade is solid. The fund's board has done a reasonable job overseeing this and Mairs & Power's other fund offering. We also like management's emphasis on investing over marketing its fund shares.

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