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Morningstar Awards for Investing Excellence--Exemplary Stewardship Nominees

These asset managers treat investors well.

Last week, Morningstar revealed the nominees for two of the Morningstar Awards for Investing Excellence: Rising Talent and Outstanding Portfolio Manager. Today, Morningstar shares its nominees for the Exemplary Stewardship award. Winners for each award will be announced at the 2019 Morningstar Investment Conference in May.

Exemplary stewards of capital boast a demonstrated track record of putting their investors' and clients' interests ahead of their own. Candidates for the award must have a Morningstar Parent rating of Positive, which indicates both a strong investment culture as well as a strong commercial culture. In determining the final nominee list, Morningstar analysts considered those firms in which Morningstar analysts have the highest conviction of an investors-first mentality. Five nominees clearly emerged. 

Capital Group (American Funds)
Capital Group, through its American Funds lineup, has been a standout dating from the industry's earliest days to the present. Founder Jonathan Bell Lovelace participated in drafting the Investment Company Act of 1940, which has protected investors ever since. Beginning in 1958, the firm pioneered its signature multimanager system. It divides each fund's asset base into separately run sleeves and lets individuals invest in line with their convictions while benefiting from interaction with their peers. That's led to benchmark-beating results for each of the firm's 11 equity funds with a 20-year track record through March 2019. A robust investment culture has helped, too. The firm compensates portfolio managers based on their results, not assets under management, giving them incentive to think long term.

Capital Group hasn't been content to rest on its laurels, either. Every seven years or so the firm reassesses its strengths, weaknesses, and opportunities. The 2017-18 reassessment tackled topics ranging from investor development and diversity to tools, technology, and data; and it led to new assignments for investment personnel while preserving continuity in management duties as much as possible. Capital Group has also steadily improved its fixed-income operations since the credit crisis, adding risk management and investment capabilities as well as personnel, including Pramod Atluri, who is a nominee for Morningstar's 2019 Rising Talent award.

Dodge & Cox
Dodge & Cox has long done things differently. It is among the U.S. investment industry's oldest and U.S. mutual fund industry's largest firms, with close to $300 billion in assets under management, including roughly $200 billion in U.S. mutual fund assets. Unlike most of its contemporaries, it has gotten there with a small stable of institutional strategies and six mutual funds, five of which earn Morningstar Analyst Ratings of Gold. (The newest entrant,  Dodge & Cox Global Bond (DODLX), launched in 2014 and earns a Bronze rating.) The firm is committed to its value-oriented, often contrarian, investment philosophy, which has produced strong risk-adjusted results over time. The firm's large funds are a bargain, but even its newer funds were priced to scale at inception and have enjoyed a cost advantage from their onsets.

The firm's team-oriented culture distinguishes it. Dodge & Cox has built five investment committees that make all the decisions pertinent to the strategies they oversee. While the firm has two public-facing leaders in chairman and CIO Charles Pohl and president and CEO Dana Emery, both are also members of an investment committee and serve as analysts, illustrating the flatness of the organization. There are no stars here. Dodge & Cox is structured as a partnership; only current employees are allowed to hold partner shares. This structure and culture have produced average manager tenures that are among the industry's longest and high retention among portfolio managers and analysts.

Fiduciary Management, Inc.
With roughly $22 billion in assets under management housed in four value-oriented equity strategies, this Milwaukee-based boutique firm has stayed within its circle of competence. FMI is focused on superior long-term investment performance, which it has achieved, with a deliberate structure that CEO and portfolio manager Pat English believes will sustain the firm's advantage. Specifically, FMI maintains a 10- to 12-person investment team to encourage close collaboration and debate while minimizing bureaucracy. The firm has also shown a willingness to close funds to protect the integrity of its concentrated large-cap funds and the capacity-constrained small-cap strategy. More recently it has cut fees to keep expense ratios in line with industry competition.

The firm's approach to succession also stands out as it can be challenging for founders to relinquish economic and management control to the next generation. Here, co-founder Ted Kellner, who retired in 2017, has been reducing his ownership stake to let investment professionals and client-facing employees increase theirs. Otherwise, analysts are in part compensated on their stock picks' performance over a three- to four-year period. Overall, the firm's investment team has been stable, with limited turnover.

T. Rowe Price 
T. Rowe Price's roots, and more than half of its assets, are in U.S. equities, and that's where the organization shines brightest, doing well in growth and value investing alike. Its international-equity team is on solid footing, too, after an early-2000s build-out. Fixed income, at 13% of assets under management, remains respectable in high yield and municipal bonds, while the firm is beginning to branch out and deepen its resources in other fixed-income areas. Meanwhile, its target-date series is among the industry's biggest and strongest, fueling much of the firm's growth in recent years. Overall, the firm has shown prowess across asset classes.

T. Rowe's strength as an asset manager stems from a prominent investment-driven culture that drives much of the firm's long-term thinking. The firm has shown an ability to attract and retain investment talent; it has closed funds before capacity concerns arise; and its funds are competitively priced. T. Rowe stands out particularly for its practices surrounding portfolio-manager changes. The firm generally provides ample notice of a change and long portfolio-manager transitions. While there have been a few more manager changes and retirements recently, T. Rowe's track record of developing its investment talent inspires confidence.

The Vanguard Group
Innovative and iconoclastic from its mid-1970s origins, The Vanguard Group's unique structure is key to fulfilling its motto: "We lead." The firm's U.S. funds (and indirectly their shareholders) jointly own Vanguard, facilitating a commitment to rock-bottom fees and sensible investment strategies.

Vanguard's mission to serve investors extends beyond its own flock, and that has transformed the U.S. asset-management industry through indexing, no-load distribution, and lowering costs for investment management. While fee pressure came to Vanguard in 2018, when a competitor launched zero-fee index funds, Vanguard remains unmatched for its low fees across the board. Nor would the industrywide trend of falling fees have happened without Vanguard's leadership.

Vanguard is not done yet. It aims to transform the asset-management industry outside the United States as well, and within the U.S. to lower the cost of investment advice. Those are current priorities for the firm, as well as improving its technology and approach to client service to help deal with the torrent of inflows the firm continues to receive.

Morningstar senior analyst Alec Lucas, Ph.D, contributed to this article.

Bridget B. Hughes does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.