Stepping back to see the forest for the trees.
This article was originally published in the April 2017 issue of Morningstar FundInvestor and represents Morningstar Analyst Ratings as of that date. Download a complimentary copy of FundInvestor here.
Heading our U.S. Morningstar Analyst Ratings committees gives me a useful vantage point for spotting trends at fund companies. Are we getting more bullish or bearish about a fund company? Is there a certain team at a firm that is a growing cause for concern? If we spot something like that, we'll dig in to be sure we understand the big picture and have funds rated accordingly.
Let's see how that big picture looks. I've built a table that shows the largest fund companies' Morningstar Analyst Ratings breakdown, ratings changes, asset size, and flow data. The changes shown are during the past 12 months. When looking at the changes, keep in mind that we rate more funds from the largest firms, so, as a percentage of rated funds, a few downgrades or upgrades are not necessarily a big percentage of a firm's money under management. This look is limited to open-end funds, though we recently started rating exchange-traded funds, and target-date funds are counted only once.
Who Comes Out on Top?
Before I get to the trends, let's examine the big picture to see who is most impressive. I pulled the percentage of Morningstar Medalists among rated funds and then highlighted the percentage of Gold-rated funds to get an idea of which firms stand out. If I were picking a fund company, I'd probably start with those figures. The graph shows the distribution of ratings for the largest fund companies. The big table shows ratings, upgrades, downgrades, the percentage of rated fund medalists, the percentage of rated funds that are Gold, fund flow trends, and market share.
Of all the data, the figure of 94% is the most striking. That is, 94% of the Vanguard funds we rate are medalists. Considering that we rate 80 Vanguard funds, it's truly remarkable. That nicely sums up why Vanguard is taking in an unheard of amount of new money from fund investors. That's a particularly difficult feat to pull off for a firm that is the largest fund company in the world, but indexing has scale that active management does not. Vanguard also has an impressive 38% of rated funds at Gold.
Two smaller firms boast 100% of rated funds as medalists. DFA and Dodge & Cox have been very consistent at delivering value to investors, though with fewer funds and less money than Vanguard. Even more impressive, though, is that Dodge & Cox has a perfect five Gold medalists out of five rated funds. Its focus and dedication to long-term thinking have built some great funds.
Looking at the percentage of medalist funds, a number of other big firms have fared quite well. Ten of the largest 11 firms have a majority of funds rated as medalists. Only Franklin Templeton fell below the line. The figure tails off after that, but TIAA-CREF is kind of an odd duck, with 91% of rated funds as medalists but lacking any Silver- or Gold-rated funds. While TIAA-CREF has fairly low costs and consistent performance, it doesn't really foster the elite investing skills that would take a fund to a Silver or Gold rating.