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By Christine Benz | 04-15-2011 09:51 AM

The Most Predictive Kinds of Stewardship

Our fund stewardship research found that corporate culture plus manager compensation incentives were highly important factors in delivering for fundholders.

Christine Benz: Hi, I'm Christine Benz for

Morningstar's fund analyst team has been evaluating funds' shareholder friendliness since 2004. Here to discuss that research with me is Laura Lutton. She is editorial director for Morningstar.

Laura, thanks so much for being here.

Laura Lutton: Thanks for having me.

Benz: So, Laura, let's quickly run through what you look for when you evaluate a fund Stewardship?

Lutton: Okay. We look at five different things and really what we're after is, how well do we think this fund is going to care for shareholders' capital going forward in the future. So, we look at things like corporate culture of the fund family. How fundholder focused is the firm? Are they more likely to put their fund shareholders' interests before their own profits. That type of thing.

Benz: So, what's an example of putting their interest before profits? How do you know?

Lutton: A good example would be closing a fund that they think is getting to be too large. It's easy for fund companies to leave funds open because flows keep coming in. They make money of those investments.

Funds that resist the temptation to launch trendy funds that they know are going to sell well because people have been interested in commodities funds or …

Benz: Currencies.

Lutton: Exactly. So, we look at the launch and merger record. We look at, does firm close funds? We look at how they market their funds. Are they fairly team in how they talk about returns? Or is that type of information up in lights?

Benz: Okay. So, corporate culture is a biggie in the methodology.

Lutton: Yep.

Benz: You also look at fees.

Lutton: We look at fees. We look at the fund board that oversees the fund to see if they have acted in shareholders' best interest by negotiating lower fees. The fund board gets to vote to close funds. They have got a say in that decision. Then, we also look at the fund managers' incentives to see if their own economic interests are aligned with shareholders'.

Specifically, we look at how the fund managers get paid. Most of their pay comes through their annual bonus, and funds have to tell us, through their statement of additional information, what the criteria are that determine what the fund manager's bonus is going to be. Specifically, we're looking to see whether long-term performance, good long-term returns, are driving the bulk of the manager's pay, because we think that's going to have the manager act in a way that's going to benefit fund shareholders.

Benz: Right. And you also look at whether the managers own their funds?

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