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Fund Spy

The Proof Is in the Pudding

Why the ingredients of good Parents make for better investments.

Last week we wrote about the Parent pillar of the Morningstar Analyst Rating. As we pointed out, the fund companies that receive Positive Parent scores have a few traits in common. Those firms' funds frequently feature lower fees, longer-tenured managers, and managers who invest their own money alongside fund shareholders. However, we don't expect investors to simply take our word for it that these practices are important. Instead, in this article we offer data and studies to demonstrate that Parent ratings, and the metrics we use to assign them, have very real implications for investor experience.

The Price Is Right
One of the most straightforward measurements of shareholder-friendliness is mutual fund expenses. Lower fees generally increase investors' chances of success, and firms will often take steps to reduce expenses, such as instituting fee breakpoints or lowering overall expenses as a fund grows. Of all the firms that currently receive Parent ratings from Morningstar, those with a Positive rating have a Firm Average Fee Level of 49, suggesting that their funds are generally in line with their peer groups. Firms that receive Neutral or Negative ratings weigh in at Firm Average Fee Levels of 53 and 65, respectively, suggesting a slightly more expensive menu of investment options.

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