Morningstar Awards for Investing Excellence--Exemplary Stewardship Nominees

Today, Morningstar shares the 2020 nominees for the Morningstar Awards for Investing Excellence: Exemplary Stewardship. The winner, alongside the recipients of the Outstanding Portfolio Manager and Rising Talent awards, will be announced in late June.

Exemplary stewards have demonstrated over time that they put investors’ interests ahead of their own. Eligible candidates must have earned Morningstar analysts’ highest conviction in their earnest stewardship of investor capital. That’s currently a limited number of U.S. investment firms; each has fostered an investors-first investment and commercial culture. From that group, Morningstar this year has nominated three firms for its Exemplary Stewardship award. All three earn a Parent Pillar rating of High.

Our inaugural award in 2019 went to The Vanguard Group, recognizing its long history of raising the bar for the investment industry by putting investors first. Considering the long-term nature of Morningstar’s assessment of investment firms and the desire to highlight more good works, we determined to choose a different firm from last year’s winner. While we continue to applaud Vanguard’s laudable efforts, we did not consider this “emeritus” firm for the award in 2020.

Capital Group (American Funds) Dating to founder Jonathan Bell Lovelace's involvement in drafting the Investment Company Act of 1940, Capital Group has long established itself as an industry leader and standard bearer. The firm has provided strong risk-adjusted results for investors (especially in equities), has low fees, and has fostered a stable investment-oriented culture that boasts long manager and analyst tenures. Capital's managers invest alongside shareholders at industry-leading levels. The firm has shown leadership on the distribution front through its "clean" F3 shares, and that should help to increase transparency around mutual fund pricing in the United States.

Capital’s signature multimanager approach to equity investing distinguishes the firm. Unity in diversity is at the heart of the multimanager system. It divides each fund’s portfolio into separately run sleeves. Each manager oversees his or her own sleeve, and the analyst-run research portfolio collectively comprises another sleeve. The result is a collection of high-conviction portfolios run in a variety of styles. It is the role of each fund’s principal investment officer, in consultation with a senior oversight board, to ensure that the styles complement one another in service of the fund’s mandate. When done well, the combination of separately managed sleeves mutes volatility but doesn’t limit strong investment results over a full market cycle. The system also minimizes key-person risk and succession issues. Capital has meanwhile steadily improved its fixed-income operations since the 2008 credit crisis, adding in recent years risk management and investment capabilities as well as experienced personnel.

Dodge & Cox Among the U.S. investment industry's oldest participants, Dodge & Cox has succeeded quietly with a fairly straightforward stock-and-bond model that has nurtured a repeatable investment process; strong, stable investment teams; a rational--and medal-winning--fund lineup; and competitive long-term performance records. A prime example of Dodge & Cox's focus on investors' best interests is the deliberate pricing of its no-load mutual funds in the bottom quartile of their respective peer groups. A second example is the methodical development of its fund lineup. Its analysts have long focused on firms' entire capital structure. That focus supported the launch of the firm's six strategies across equities and fixed income. Other evidence of the firm's investor-centered approach includes its well-telegraphed, gradual successions; its consensus-oriented decision-making that minimizes key-person risk; and its willingness to close strategies to protect its investment style.

Although some of its strategies took a beating in the global financial crisis, the firm had warned investors that its strong returns leading up to that time might not go on indefinitely. It has since increased shareholder communications to educate investors on its process and encourage a long-term investment mentality. The firm has been honest about its funds' challenges in 2020--which were tied, in part, to its energy and financials holdings. But Dodge & Cox’s funds have fared well over the long term.

T. Rowe Price T. Rowe Price has a strong, consistent culture that the firm has maintained through the years, even in the wake of retirements, some unexpected departures, and headwinds for active management. The firm's success is rooted in its fundamental approach to active management and deep analyst bench. Investors benefit from managers' generally long tenures at the firm, well-planned manager transitions, the firm's ability to attract and retain talent, and reasonable costs for active management. The firm takes a long-term, investor-focused approach to its business. It avoids trendy fund launches and closes strategies when they near capacity. T. Rowe handles succession planning well, including recent retirements within fixed income; transitions of six months to a year are common. Management tends to get the right people in the right seats, so there aren't many managers who don't work out, which minimizes disruption to the end investor. Strategies also tend to stay fairly consistent over time, so investors generally can keep owning them throughout a manager change.

Even amid a global slowdown, T. Rowe plans to keep hiring on the investment side. The firm hired in past downturns while some competitors faced layoffs, reflecting the power of its healthy corporate balance sheet and commitment to maintaining its investment edge in an increasingly competitive industry. In recent years, the firm has bolstered resources in its critical multi-asset group, responsible for much of its asset growth, as well as the increasingly impressive quantitative team. Its equity division remains top of mind, too: The firm has made experienced hires in key areas such as healthcare.