Dodge & Cox and T. Rowe Price lead the way.
This is an update of a study that originally ran in Morningstar FundInvestor. We updated the data through the third quarter, resulting in some changes in the rankings.
It's time for my annual look at fund companies. I gather data on a number of key measures, then roll them all up into one big ranking to see how fund companies are doing overall.
Seeing the big picture helps to assess how strong a fund company is across the board. Choosing the right fund company is as important as choosing the right fund. After all, a fund doesn't operate in a vacuum. Managers generally draw on a common pool of analysts and traders. When a manager leaves or retires, his replacement often comes from that pool. Moreover, the fund company's values, investment abilities, and time horizon all come into play over the life a mutual fund.
I have summed up fund-company results based on a few key metrics: five-year relative performance ranking, Morningstar Analyst Rating, average manager tenure, average manager investment, and five-year retention rate. Then in each case we took that data set and turned it into a percentile rank among the 30 largest fund companies. So, the best in a column has a rank of 1, second best is 4, all the way down to 100 for the worst. We then had a figure we could average to create an overall score. Each measure is given the same weighting in our overall score.
For Analyst Rating, we assigned a 5 for Gold-rated funds, a 4 for Silver, a 3 for Bronze, a 2 for Neutral, and a 1 for Negative. It's worth noting that this is affected by which funds we cover for a fund company, though in each case we are covering their biggest and most important funds.
For average manager investment, we use the midpoint of a reported range to come up with an overall average. Thus, if a manager is reported to have invested between $100,000 and $500,000 in his fund, we would assume he had $300,000 in his fund.
The five-year retention rate is a figure FundInvestor readers probably know well, as it debuted in these pages when I first wanted to measure how well fund companies are retaining their managers. We look at all the managers at a firm at the beginning of the year, then measure what percentage are still there at the end of the year, and then average that figure over five years. The measure was later adopted as a component of our Stewardship Grades.
In consulting and industry circles, stability of management is often considered the best measure of investment culture. If managers are heading for the exits, it usually means there are some big problems at the firm. Creating a healthy culture where very skilled and sought after investment professionals want to stay for their whole career is one of the hardest things to do in the money management world.