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What Makes a Grade A Fund Company

Two exemplary stewards of shareholder capital.

Laura Lallos, 11/13/2012

Quick: Name as many of the leading U.S. fund companies as you can off the top of your head. Vanguard, Fidelity, American Funds, PIMCO, T. Rowe Price … did Dodge & Cox spring to mind? Perhaps not; Dodge & Cox is not a household name and has never tried to be. But the company is the 13th-largest mutual fund provider in the U.S., with $120 billion in assets as of the end of September.

Self-directed, no-load retail investors--such as the subscribers to our newsletterMorningstar FundInvestor--are in the know. In a recent survey of these informed readers, we found that half of them own at a least one Dodge & Cox fund. Only three fund companies had higher rates of ownership: Vanguard (85%), Fidelity (62%), and T. Rowe Price (60%).

Dodge & Cox deserves the attention: It is one of the finest fund companies there is.FundInvestor's editor Russ Kinnel recently ran a quantitative assessment of the largest fund companies and Dodge & Cox came out on top.

Dodge & Cox also shines in our Stewardship ratings, which incorporate qualitative as well as quantitative components. It has the rare distinction of earning not only an overall A, but an A for the individual components that go into the rating: Corporate Culture, Manager Incentives, Fees, and Board Quality. (For the fifth component, Regulatory History, a company can earn only Neutral or Negative; we don't give As for simply following the rules.)

So what makes for a straight-A fund company? The only other company that rates as highly is Primecap Management, and it has a lot in common with Dodge & Cox.

Corporate Culture
These two shops feature management teams with long tenures who employ fundamental research and take a long-term perspective. That's not to say that a fast-trading quant shop with a star-manager system would be precluded from earning an A. But it is easier to predict continued success for fund companies that minimize key-person risk, nurture and retain talent, and follow a clearly articulated long-term strategy.

Neither company does aggressive marketing, and each stays within its circle of competence. Dodge & Cox opened its first fund in 1931 and has only five offerings today--all of which have earned a Morningstar Analyst Rating of Gold. Primecap was founded in 1983 and opened its three Gold-rated mutual funds in 2004.

Both firms are run by the fund managers themselves. That is no doubt why protecting their successful investment strategies comes first. You won't find them rolling out the fund flavor of the month to take advantage of hot money. What's more, Dodge & Cox closed its popular Stock DODGX and Balanced DODBX funds in 2004 after assets flooded in and did not reopen them until 2008, after considerable outflows during the financial crisis.

Laura Lallos is a former Morningstar analyst and editor, and a frequent contributor to Morningstar Advisor magazine.
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