Strong Stewardship Practices Lead to Fund Success

Morningstar explained that stewardship is whether a fund will take good care of investors’ money and put fund shareholders’ interests first.  

The study looked at how funds have performed since Morningstar first issued its Stewardship Grades in 2004 and again after the company revised its Stewardship methodology in 2007, and found almost all–about 99%–funds that received “A” Stewardship Grades survived. More than 80% of the funds earning grades of “A” or “B” in 2007 had competitive risk-adjusted returns relative to their peers.  

On the other hand, according to a press release, approximately one-third of funds receiving an “F” grade in 2004 didn’t survive to today, and about one-quarter of funds receiving a “D” grade were liquidated or merged away.  

In addition, the research found approximately 87% of funds that earned “A” grades for corporate culture in 2007 were successful in the ensuing period. Managers who have their own financial incentives aligned with fund shareholders had good results—more than 75% of the equity funds earning “A” grades in 2007 in the manager-incentive category were successful in the ensuing period. Funds with low fees had the best risk-adjusted returns, primarily over long-term periods.   

The press release said among all current fund evaluations, the most common Stewardship Grade is a “C,” which Morningstar assigns to 455 funds. On the high end of the scale, 90 funds currently earn an “A” overall grade and 359 funds receive a “B.” On the lower end, 145 funds currently receive a “D,” and just two funds receive an overall Stewardship Grade of “F.”   

Morningstar’s study also calculated an average Stewardship Grade for all of the funds it grades within 44 different fund families. Six fund families currently earn an average overall Stewardship Grade of “A”: American Funds, Clipper, Davis, Diamond Hill, Dodge & Cox, and PRIMECAP. Average overall Stewardship Grades of “B” are assigned to another 16 fund families, and 17 fund families receive “C” grades. Five fund families receive “D” grades in the report. No fund family currently receives an average overall Stewardship Grade of “F.”