How do the largest fund companies stack up?
This article originally appeared in the September issue of Morningstar FundInvestor.
Investing wisely in mutual funds requires you to know the fund company as well as the fund you own. Over the long haul the fund company behind the fund will be providing analyst support, setting fees, adjusting your manager's incentives, and likely hiring his or her replacement. How well the firm supports your fund will have a lot to do with how well the fund fares in the long haul. There will be quite a few points at which the fund company will decide between its near-term profits and the long-term benefit of fundholders.
With that in mind, I'm taking a quantitative look at how fund companies rate on a number of key metrics. We take data on all their individual funds and roll them up into percentile rankings to see the big picture. All share classes are included, but we exclude funds of funds to avoid double counting. You may recall that I last ran the data in the March 2010 issue using figures through December 2009. I looked at five-year relative performance, average Stewardship Grade, average manager investment, average manager tenure, and five-year manager retention. Average manager investment is calculated by assuming the midpoint of the reported ranges and then converted to a percentile ranking.
The five-year manager retention is calculated by looking to see what percentage of managers remain at the firm over the course of a year and then averaging that for five years. Hiring more managers won't hurt the fund company's manager-retention score, but losing managers will. Manager retention tells you a lot about a firm's culture and its ability to attract and retain top talent. If those who know the company best are fleeing, you probably should not be buying. I have also averaged those rankings for an overall score.
T. Rowe, Dodge & Cox, Harbor Lead on Returns
At the end of 2009, Janus and MFS were on top of the performance ranks. A couple of funds' aggressive bets on India helped Janus to the top before, and now they've brought them down to below average. MFS dipped a bit from averaging top 28% to top 45%.
Impressively, though, T. Rowe Price continues to have strong five-year performance. T. Rowe Price edged higher with top 24% performance. I like the fact that it was near the top both at the end of the bear market and now that there's been a strong rally. Dodge & Cox has rebounded from a hard 2008 to produce top 27% on average, and that makes it second-best in the return rankings. Harbor, which has a number of funds managed by PIMCO as well as some strong stock-pickers, comes in at an average of top 28%.
Federated, Janus, and BlackRock clocked in with the worst returns.
Our Stewardship Grades rate fund companies on their culture, their ethics, their fees, and their board. Although there are quantitative elements to the grades, it's also qualitative, the only element in these fund company rankings that isn't purely quantitative. We averaged the grades across all of the rated funds at each fund company. T. Rowe Price, American, Dodge & Cox, and Vanguard are among the best. They have low fees and strong investment cultures, and they consistently look out for investors' interests. Wells Fargo, John Hancock, and AllianceBernstein are near the bottom.