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Funds With Principles Make Good Partners

New Morningstar study shows Stewardship Grades predict success for fundholders.

Splashy returns and a charismatic star manager may give a mutual fund some sparkle, but a successful long-term investment is built on more than first impressions. All investors--whether they're individuals with modest nest eggs or institutions with billions on the line--want their hard-earned capital managed thoughtfully and respectfully year in and year out.

Morningstar's Stewardship Grades for mutual funds are designed to highlight which funds are likely to be good long-term partners for investors, and a new study of the grades shows it pays to be choosy. Morningstar found that most funds earning high Stewardship Grades were successful in the subsequent years. Specifically, they were very likely to survive and provide competitive risk-adjusted returns.

To determine which funds are good caretakers of capital, Morningstar's fund analysts visit fund companies, conduct extensive interviews, and comb through regulatory filings to evaluate five areas: The corporate culture of the fund's parent company; the quality of the board of directors governing the fund; the fund manager's financial incentives; the fund's fees; and the fund company's history with regulators. Each of those five areas earns a score and a letter grade, and by combining the five areas, one arrives at the fund's overall Stewardship Grade. Morningstar issues Stewardship Grades--A, B, C, D, or F--to more than 1,000 funds and updates those grades regularly.