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By Russel Kinnel and Christine Benz | 06-29-2016 02:00 PM

4 Good Stewards That Are Also Good Investments

With a meaningful link between investor returns and stewardship, Morningstar's Russ Kinnel looks at four funds with long-term thinking, experienced leadership, and low costs.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Morningstar's analysts focus on a concept called stewardship. Joining me to discuss what it is and share some funds that have it is director of manager research Russ Kinnel.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, in your latest issue of Morningstar FundInvestor, you took a look at funds that are good stewards and also good funds. So, let's start with this concept of stewardship. When you and the team think about this, and I know that funds are assigned Stewardship Grades, what kinds of things are you looking at?

Kinnel: Well, we're looking at things like culture. Do they develop good analysts? Do people make a career of staying there? We look at how they treat investors--in other words, do they come out with a lot of funds and gimmicks or are they more focused on helping people invest in core strategies? Are they honest with investors, do they close funds in a timely manner? Do they charge low fees? So, sort of a wide array of factors that over the long term really can impact fund performance.

Benz: Well, that's what I want to talk about. I mean, obviously, there are a lot of sort of intuitive reasons that you'd want your fund manager to be a good steward. But when you look at performance, have you identified a link between good stewardship and good performance?

Kinnel: In my latest "Mind the Gap" study, which we published on Morningstar.com in earlier June, we found that there is a meaningful link with investor returns and good stewards. In other words, the best stewards, we found that, first off, investors had better returns but also that they used the funds better, their timing was better. And again, I think that speaks to having good core strategies that people can hold on to, but also good communication around them so that the fund companies aren't hyping them after they've had a big rally, they are not promising a free lunch the way we've seen, especially, in the alt space, but in other areas, too. So, I think you just have this positive confluence of good investors and good stewards, and it leads to better results.

Benz: So, you did share a list of funds that are good stewards that we also like that are medalist funds. But before we get into those, when you, kind of think across this group of funds, what are some unifying themes? What are some commonalities among them?

Kinnel: Long-term thinking, really across the board. In other words, these are funds run for the long term. You see very experienced managers running them, so tremendous management stability. Tremendous strategy stability, so that even if there's a manager change, the strategy lives on. Low costs, which of course, are really important in the long run. And just a sound strategy. You don't see undue risks here. You see well-designed strategies that really take into account the fact that investors are human and they don't do so well when you have really extreme performance. So, all these factors you see across the board in these funds.

Benz: So, let's start with the first one, American Funds New Perspective. Let's start by talking about why you and the team think that American Funds is a good steward and also, why you like this fund in particular.

Kinnel: Yeah, American is just a very solid firm where analysts and managers alike make a career. So, you can go on a career analyst path; you can go on a career portfolio manager track; and generally, people do stay there their whole careers. They really like working there. And you see that in the funds where you've got multiple portfolio managers working with the analyst staff, and so what you have is a very stable organization, very stable funds. One manager leaves, another one comes on, but it doesn't really upset the fund. And I think in addition, you just have a really good culture of understanding equities because you have that analyst depth that few firms can match.

Benz: And also, pretty low costs, especially for funds that have historically been sold through financial advisors.

Kinnel: Right. Often the lowest-cost provider in the advisor channel.

Benz: So Dodge & Cox Income, I think, Dodge & Cox in a lot of our minds is a firm that really does epitomize good stewardship. So let's talk about the firm from that standpoint and then Dodge & Cox Income from the standpoint of just being a good investment.

Kinnel: Right. This is a good core fund. This is the only domestic bond fund Dodge & Cox offers. And if you think about it, they are just a very conservatively run operation where people make a whole career of it. A lot of money came out of PIMCO Total Return, some of it came into this fund because of that stability. I think it's just a focus on corporate issues and mortgages and just a very straightforward fund that is maybe easier to understand than some of the others. I mentioned PIMCO Total Return and some others, they use a lot of derivative strategies. This is a pretty straightforward, dependable fund.

Benz: And value is kind of a unifying theme across all of Dodge & Cox's …

Kinnel: That's right. They are looking for value in corporate bonds and mortgages this time, but there's still a lot of overlap in that strategy and also a long-term focus and of course, low costs.

Benz: T. Rowe Price Dividend Growth. One thing you hear is that the publicly traded asset managers won't ever necessarily be good stewards. I know that you and the team think that T. Rowe Price is a good example of a publicly traded asset manager that actually is a good steward. Let's talk about that issue before we talk about the fund in particular.

Kinnel: That's right. T. Rowe has shown that it can be done. They are clearly not internally trying to maximize profits in the next quarter or the next three quarters because they're very stable. They'll close funds to new investors. They don't do any of the tricks you see bad stewards doing. It's a very stable firm. When they have a manager change, they will often announce it well in advance so that there's time for a transition, both on the portfolio manager side but also for investors to get to know the new managers and to decide what they want to do. So, they are very transparent organization that's very consistent in what they do.

Benz: So a related question, Russ, and I know that you and I have kind of talked about this before, but let's just talk about the manager changes that have happened at T. Rowe Price over the past couple of years in the executive suite as well as on some of the funds. How has that affected you and the team's view of T. Rowe's stewardship?

Kinnel: Well, we have downgraded some of the individual funds, but we still think as a firm they're quite strong. A lot of the manager changes we've seen have been retirements. T. Rowe managers typically retire between ages 60 and 65, which is understandable, but there have been maybe a little more as more managers have come to that age. But it still seems to us like a very stable organization, like they still have that stewardship orientation. But you're right, the number of prominent manager departures or retirements has picked up a notch.

Benz: So, T. Rowe Price Dividend Growth, it maybe has not gained as much attention as Vanguard Dividend Growth, but I know that you and the team still like it a lot.

Kinnel: Yeah. If you look at performance, I mean, it's just outstanding performance even though it hasn't gotten as much attention. And I think both Vanguard and T. Rowe Price, their dividend growth strategy is a really nice one because you're getting some income but the dividend growth forces you to look for clean balance sheets, healthy companies, so really kind of have a couple of levels of stabilizers that protect the fund in a shock and it's really just a nice stable fund that consistently outperforms under Tom Huber.

Benz: Let's talk about Vanguard Developed Markets Index. This is a fund that I own actually. Let's talk about the case for Vanguard as a good steward and then this particular fund, why you think it's attractive.

Kinnel: Right. Well, obviously, Vanguard has some unique stewardship attributes that no one else does because they are owned by fundholders, because their mandate is deliver funds at costs, because their employees are incentivized to lower costs, when everyone else is more or less incentivized to raise costs or at least raise profits. So, Vanguard really is in a unique position in the industry, and you just see that in the way they have plain talk. As they like to say, they are very direct in explaining why you would own an investment, and they are also very good at choosing strategies and keeping up to speed. So, for instance, this fund changed its index about a year ago because Vanguard is always trying to look for marginal ways to improve the index, improve that investor experience, and I think you can really see that in this fund.

Benz: Russ, always great to hear your insights. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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