Fund Stewardship Matters: Morningstar Research Shows Link Between Good Stewardship and Strong Performance for Canadian Fund Companies

TORONTO, Sept. 29, 2014 /CNW/ - New research from Morningstar Research Inc. (Morningstar Canada), a subsidiary of independent investment research provider Morningstar, Inc. (NASDAQ: MORN), has found that Canadian fund companies with higher Morningstar® Stewardship Grades^SM have better-performing funds relative to category peers.

The Morningstar Stewardship Grade, launched in 2004 in the United States and in 2010 in Canada, measures the extent to which fund companies align their interests with those of fundholders. It is based on the premise that good stewards are likely to provide fundholders with a better experience than poorer stewards.

Morningstar analysts examined the link between rated firms' 2010 Stewardship Grade and their funds' subsequent performance from June 2010 through June 2014. They then studied the relationship between key components underlying the Stewardship Grade—including corporate culture, manager incentives, and fees—and subsequent performance. Performance was evaluated using the Morningstar Success Ratio, which measures the percentage of a firm's funds that have survived and outperformed the median fund in a respective category, considering the funds' total returns as well as risk-adjusted returns.

"This study further supports the premise behind the Morningstar  Stewardship Grades, which is that fund companies that align their interests with those of fundholders are more likely to serve fundholder interests well," Christopher Davis, Morningstar Canada's director of manager research and author of the research study, said. "Our findings are in line with previous Morningstar research about U.S. fund companies that correlates better grades and stronger fund performance, as well as with a number of academic studies. As fiduciary relationships require a high degree of trust, the Stewardship Grades help qualify a firm's likelihood of putting investors' interests first."

Morningstar evaluated the 27 Canadian fund providers to which Morningstar analysts had assigned a 2010 Stewardship Grade. The group includes both large and smaller providers, and represents approximately 75 percent of the industry's assets and 1,500 distinct funds.

Among this group, Morningstar analysts assigned five firms a Stewardship Grade of "A," six firms received a "B," 15 firms received a "C," and one firm received a "D." Overall, Morningstar found that fund companies with higher Stewardship Grades had better-performing funds during the study period, as measured by their Morningstar Success Ratios.

Other key findings of the research study include:

• Overall, firms with Morningstar Stewardship Grades of A dramatically outperformed those with a B grade, while the B-rated stewards modestly outperformed those with a C grade.
• The highest-rated corporate cultures posted better Success Ratios. Average Success Ratios for firms with the highest culture scores were 80.4 percent, compared with average Success Ratios between 46.4 percent and 55.8 percent for firms with lower culture scores. The correlation between corporate culture and performance was not as strong as the fee component of the grade, but much stronger than the manager incentives component.
• While limited disclosure from fund companies made manager incentives scores difficult to measure, companies with the highest manager incentives scores did, on average, outperform peers. Average Success Ratios for firms with the highest manager incentives scores were 80.3 percent, while average Success Ratios of lower-scoring firms ranged from 33.4 percent to 48.3 percent.
• For the fee assessment, which weighs whether fund companies offer fundholders fees lower than similar peer funds, findings were consistent with previous Morningstar research, with lower fees linked to better performance. Average Success Ratios for firms with the most reasonable fees were 70.6 percent, while average Success Ratios of firms with higher fees ranged from 26.1 percent to 47.3 percent. The correlation between fees and Success Ratio was even higher than that between the overall Stewardship Grade and the Success Ratio.
• In looking at the relationship between fund providers' business models, Stewardship Grades, and performance, all five "independent, do-it-yourself" providers in Morningstar's coverage universe earned A grades, and also boasted Success Ratios twice that of the other broad business model groupings (diversified financial institutions, and independent, advisor-focused providers), both in absolute and risk-adjusted terms. These providers include Beautel, Goodman & Co.; Capital International; Chou Associates; Mawer Investment Management; and Steadyhand Investment Funds.

The study also includes an analysis of the Canadian fund industry, noting that it has improved stewardship practices overall since 2010, resulting in more companies earning passing grades when graded again in 2013, and no companies received grades of D or F.

In instances where analysts did not assign a Stewardship Grade, they substituted a Parent rating, a pillar of the qualitative Morningstar Analyst Rating™ for funds that evaluates People, Process, Parent, Performance, and Price. The Parent pillar rating uses the same criteria as the Stewardship Grade, though instead of letter grades, fund companies receive Positive, Neutral, or Negative ratings. Firms with a Positive Parent pillar rating would receive an A or B Stewardship Grade, Negative firms a D or F, and Neutral firms a C. In the study, Parent pillar ratings are converted to the equivalent Stewardship Grade.

The study, which includes the 2010 and 2013 Stewardship Grades for the 27 fund providers evaluated, is available  at https://global.morningstar.com/CAFundStewardshipResearch. Morningstar's Stewardship Grade methodology for Canadian mutual funds is at https://global.morningstar.com/CAFundStewardshipMethodology. Morningstar's Analyst Rating for funds methodology is available here. Premium Members can view Morningstar's Stewardship Grades and reports for Canadian fund firms on Morningstar.ca™, the company's website for individual investors. Detailed analysis, as well as the firm-level data included in the study, are available in Morningstar Direct^SM, the company's global investment analysis platform for institutional investors, and Stewardship Grades and Parent pillar ratings are available in Morningstar^® Advisor Workstation™, a global practice and portfolio management solution for advisors.

About Morningstar Research Inc. and Morningstar, Inc.
Morningstar Research Inc. is a Canadian subsidiary of Chicago-based Morningstar, Inc., a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 473,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 12 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $169 billion in assets under advisement and management as of June 30, 2014. The company has operations in 27 countries.

Stewardship Grades and Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. They are based on Morningstar analysts' current expectations about future events and therefore involve unknown risks and uncertainties that may cause Morningstar's expectations not to occur or to differ significantly from what was expected. Morningstar does not represent its Stewardship Grades or Analyst Ratings to be guarantees nor should they be viewed as an assessment of a fund's or the fund's underlying securities' creditworthiness. The contents of this press release are for informational purposes only and should not be considered an offer or solicitation to buy one or more of the mutual funds offered by the above-mentioned mutual fund companies.

SOURCE: Morningstar Research Inc.