Morningstar’s firm-level data shows the way to fund companies that treat their shareholders well.
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.
Morningstar calculates the straight average manager tenure of the longest-running manager on a fund as well as the asset-weighted average. The latter puts more emphasis on the stability of a firm’s largest funds. Dodge & Cox stands out with an asset-weighted manager tenure of 24 years. Franklin Templeton Investment Funds, a more diversified shop, has an asset-weighted firmwide manager tenure of over 21 years. Popular bond giant PIMCO has an asset-weighted tenure value of over 15 years, but this is heavily influenced by Bill Gross’ lengthy term at the helm of PIMCO Total Return; the firm’s straight average tenure is just five years. So, it can be helpful to look at these numbers together when studying shops with a larger number of funds. Firm % Assets Manager Investment Over $1 million 80 And Oldest Share Class Yes Perhaps the data related to managers that is scrutinized most closely by analysts is manager investment in the funds they run. Managers who eat their own cooking align their interests with those of fund shareholders. The gold standard for ownership is more than $1 million—the highest ownership range that’s annually disclosed to the Securities and Exchange Commission. Morningstar takes the highest investment by any listed manager in a fund and counts that investment level toward the firm-level breakdown.
In Morningstar Office, the data points correspond to the ranges available for reporting in the Statement of Additional Information: Firm % Assets Manager Investment Over $1 Million, Firm % Assets Manager Investment $100,001–$500,000, etc. In the Morningstar Stewardship Grade methodology for fund firms, analysts give full credit for manager ownership if 80% or more of firm assets reflect ownership by a manager of more than $1 million. Oakmark is one fund shop where managers own at least $1 million in every single fund managed by the firm.
Firm Average Fee Level < 20
Or Firm % Share Classes in Low Fee Level > 40
Or Firm % Share Classes in Below Average Fee Level > 40
And Oldest Share Class = Yes
Morningstar analysts regularly use fee level percentile ranks to assess firmwide fees. These numbers can reveal whether keeping fees low is a pervasive part of firm culture or something reserved for only a subset of funds. It’s also a check on the funds’ board of directors, which is charged with negotiating fund fees on behalf of fund shareholders. The Morningstar Fee Level evaluates a mutual fund share class’ annual net expense ratio relative to other funds that invest in similar asset classes and have similar distribution characteristics. For example, funds in large-value, large-blend, and large-growth categories are combined and then regrouped by distribution class of front load, deferred load, level load, no load, and institutional before being ranked.
Unsurprisingly, Vanguard ranks at the top, with 100% of share classes falling into the low fee level bucket and a firm average fee level rank of just 3 (on a scale of 1 to 100, with 1 being the lowest expense ratio in the fee level group). DFA follows closely with about 98% of shares with low fee levels and a firm average fee level rank of 8. TIAA-CREF, which features a lineup split between indexed and actively managed funds, also scores favorably, with around 80% of share classes with low fee levels, most others with below average fee levels, and a firm average fee level rank of 12. On the other end of the spectrum, Commonwealth International Series Trust and Pacific Advisors Funds each manage a handful of funds that all receive high fee levels; the firms garner a firm average fee level of 100.
Although virtuous stewards of investor capital
can’t be vetted solely through data searches,
such firms do tend to share certain quantitative
characteristics. Also, even firms that earn
a firm-level Morningstar Stewardship Grade
of A, such as Primecap and Vanguard,
have room to improve in some areas. American
Funds also has a strong stewardship profile
evidenced through the data. Whether
through detailed review of the data or by a mix
of qualitative and quantitative factors, advisors
who look to partner with firms that strive
for high stewardship standards will serve any