A Good Steward Is Easy to Find

When looking for a new investment idea, it can be tempting to employ screens that quickly get you to a handful of funds. Another approach would be to find a fund company that has good stewardship and performance attributes, and then choose an appropriate fund from the firm’s lineup. Here are some screens we ran in Morningstar Office that will help you find good stewards.

( Morningstar Stewardship Grade >= B
Or Morningstar Analyst Rating—Parent Pillar = Positive )
And Oldest Share Class 5 Yes

Morningstar provides full stewardship coverage on more than 40 U.S. fund firms and Parent Pillar Ratings on about 70 additional firms (as part of our new Morningstar Analyst Rating). The easiest way to identify a top steward of capital is to look among these firms. From the Morningstar Ratings and Grades data view, select Morningstar Stewardship Grade > B and Morningstar Analyst Rating— Parent Pillar Positive. Search results return all share classes with the grade or pillar rating assigned, so adding a screen for oldest share class will help keep the resulting list manageable. After clicking OK, bring the Firm Name data point into the search results view and sort on it to more clearly assess the firms returned. American Funds, Davis Funds, Diamond Hill Funds, and Dodge & Cox are a few of the standout stewards returned when we did this search in April. But you don’t have to take our word for it. Using Morningstar’s firm-level data, advisors can perform their own screens and due diligence on firms.

One compelling firm-level metric is the breakdown of Morningstar Overall Ratings across the lineup. On Morningstar’s Global Fund Reports, we show this breakdown in graphic and table format to give advisors an easy way to see whether firms are performing well against peers on a risk-adjusted basis as measured by the overall Morningstar Rating for funds, or star rating. These figures are asset-weighted, so a large fund with either a very good or very poor performance history can significantly have an impact on the results. However, when looking for a partner asset manager, the performance of its biggest core funds might be especially relevant to an advisor’s assessment of fit in a client’s portfolio. If you are looking at a shop for satellite investments only, however, this breakdown may be less relevant.

Firm % Assers Overall Rating 1 Star < 10
And Firm % Assers Overall Rating 2 Stars < 10
And Firm % Assers Overall Rating 4 Stars > 20
And Firm % Assers Overall Rating 5 Stars > 20
And Oldest Share Class = Yes

In Morningstar Office, use firm-level data points such as Firm % Assets Overall Rating 5 Stars to screen for investments from firms that have a longer-term track record of producing more funds with peer-beating performance than underperformers.

Similarly, advisors can screen on the single data point Firm Average Morningstar Rating Overall. This can provide a quick and dirty assessment of a firm’s performance versus peers. Firms that score well on this measure because they have few or no funds with overall Morningstar Ratings of 1 or 2 stars include Artisan, First Eagle, and Loomis Sayles. Conversely, a couple of shops that score well but have a healthy chunk of assets in 2-star funds include Domini, FPA, and Hancock Horizon.

Firm Manager Retention Rate 5 Year > 90.00
And Oldest Share Class = Yes

One of the calculations that Morningstar analysts use to assess manager behavior and incentives at the firm is manager-retention rate. This calculation shows the percentage of the firm’s listed portfolio managers who have stayed with the firm during the past three or five calendar years. Firms with rates above 90% are stable. However, be mindful that this measure may be more appropriate for gauging manager turnover at large fund companies.

At smaller shops, a single manager departure could severely have an impact on the retention rate, and on the flip side, it’s relatively common to see retention rates at 100% for smaller firms. Generally though, this statistic helps to show whether the firm is doing the right things to retain valuable portfolio manager talent. Stability in the manager ranks means that the people an advisor chooses to invest with today will likely be the same people who will be running the investments tomorrow. 

A couple of firms with five-year managerretention rates north of 95% and diversified lineups are American Funds and Manning & Napier, while Loomis Sayles (bond funds) and Royce (small- and mid-cap and international funds) also score well on this screen. 

Firm Asset-weighted Manager Tenure (Longest) > 10
And Firm Average Manager Tenure (Longest) > 10
And Oldest Share Class = Yes

One factor not captured by the firmwide retention rate is whether managers have moved from fund to fund within the firm. This fund-to-fund turnover could still be cause for concern, so it’s helpful to consider the retention rate alongside a fund-specific measure such as average manager tenure.