New study points to differences among top firms' stewardship practices and performance.
The fund industry’s largest firms all have swagger. Together they control more than two thirds of the industry’s mutual fund assets, and most--if not all--are household names.
Morningstar contends, however, that not all of these industry leaders are top caretakers of capital, and a new study from Morningstar finds the firms vary on important attributes related to fund manager tenure, retention, and personal investments in fund shares. There are also significant differences in the fees they charge. The study found that among the top-20 firms, those with stronger stewardship practices have delivered better outcomes for fundholders.
Morningstar offers a more in-depth analysis of firms’ care of capital through its Morningstar Stewardship Grades for fund firms, which analysts assign to the top 20 asset managers as measured by total mutual fund assets under management. The Stewardship Grades consider Corporate Culture, Fund Board Quality, Manager Incentives, Fees, and Regulatory History--the same methodology that determine a firm’s Parent rating, which is incorporated into individual funds’ forward-looking Morningstar Analyst Ratings. But the Stewardship Grade and Stewardship Reports delve into the details of the five components that make up the overall grade, whereas the Parent ratings feature an overall rating and summary.
Morningstar calculates firm-level data to support the qualitative research that goes into assigning Stewardship Grades and Parent ratings. These data provide additional insight into the fund industry’s mega-firms and show interesting differences between the firms earning A, B, and C grades.
To be sure, these are very small peer groups—only four firms earn A Stewardship Grades, for example—but the firms with A Stewardship Grades have longer-tenured managers, higher longer-term manager-retention rates, higher manager ownership of fund shares, and lower fees. They also have been more successful, as measured by the Morningstar Success Ratios and Morningstar Risk-Adjusted Success Ratios. These success ratios consider how many share classes a fund firm offered at the beginning of the measurement period, and then tally how many share classes both survived and outperformed, based on category rank and a risk-adjusted category rank.
Interestingly, there are marked differences in the investment approaches and business strategies of the four A firms. Each of those firms, however, have had stable lineups and have not had to merge away many--if any--trendy funds that failed to attract investors or perform competitively, an attribute that helps the firms’ success ratios by limiting the size of the denominator.
Vanguard, which is mutually owned and offers its funds at cost to investors, charges rock-bottom fees that help bring the peer group’s average down. What’s more, the firm's lineup of funds is largely passive, and indexed funds have outperformed actively managed funds in recent years, which is a boost to the success ratios. The firm’s actively managed funds have also been winners.
Dodge & Cox, a smaller firm in terms of investment offerings and staff, is notable for its long manager tenure and high manager ownership, lifting the peer-group averages. Its success ratios are uniformly high, even though its slim lineup of concentrated value-leaning offerings suffered horrible losses in 2008’s market crash.