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Better Stewardship and Better Returns Go Hand in Hand

A new Morningstar study suggests that investors often benefit when they seek out firms with strong stewardship characteristics.

Bridget B. Hughes, CFA, 04/08/2014

new study from Morningstar looked at more than 750 asset managers offering U.S. mutual funds and found that those with stronger fund manager tenure, retention, and personal investments in fund shares also delivered better returns for fundholders. The same is true for firms charging lower fees for their funds.

The study suggests that better stewards of capital have provided better investor experiences, so Morningstar looked at whether the firm-level statistics featured in the study were independently pointing to that conclusion, or were highly correlated with one another. The study found that more data is better: The data points provide independent signals and were not highly correlated. This increases Morningstar's confidence in the study's results and suggests that investors often benefit when they seek out firms with strong stewardship characteristics.

Defining the Data
The study looked specifically at firms' average longest manager tenure, both equally weighted and asset weighted. It also considered manager retention at the firm, both for a single year, as well as over a five-year period. Morningstar studied fund managers' investments in the funds they run, in particular the percentage of the firm's fund assets where at least one manager invests more than $1 million of his own money alongside fundholders.

To examine fees, Morningstar used its Morningstar Fee Level--Distribution data point, which ranks fund share classes in peer groups that consider strategy as well as distribution characteristics, like load charges and minimum investments. To measure those fees at the firm level, Morningstar averages the Fee Level percentile ranks across all of the firm's share classes.

And to determine whether a firm's funds have performed well and delivered a good fundholder experience, Morningstar calculates two success ratios: Morningstar Success Ratio and Morningstar Risk-Adjusted Success Ratio. Both measures' denominators include all of the firm's share classes at the beginning of the measurement period. The numerator includes any share class that survived and performed in the top half of its category. The Morningstar Success Ratio considers funds' category rank based on total return, while the Risk-Adjusted Success Ratio looks at funds' category rank based on Morningstar Risk-Adjusted Return.

The following table shows the correlation among the various statistics discussed above, plus a few more, including firm growth rate over the past five years, fund launches over the past five years, and fund liquidations and mergers over the past five years. Launches, liquidations, and mergers are addressed to some extent in Morningstar’s Success Ratio and Risk-Adjusted Success Ratio calculations, which consider each fund family’s number of offerings at the beginning and end of the calculation time period.

Checking Correlation
Correlation measures the existence of two variables together but doesn't always indicate causation. In evaluating the matrix, Morningstar considers generally accepted interpretations of correlation; specifically, a correlation between 0.0 and 0.1 (positive or negative) indicates no correlation, between 0.1 and 0.3 (positive or negative) suggests weak correlation, between 0.3 and 0.5 (positive or negative) medium correlation, and between 0.5 and 1.0 (positive or negative) strong correlation.

Bridget B. Hughes, CFA, is an associate director of fund analysis with Morningstar and is also happy to chat with you.

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