A couple weeks ago I wrote about characteristics of good actively managed mutual funds, which talked about finding managers who have most aligned their interests with their investors.
I just discovered that there is also something similar called the Morningstar Stewardship Rating, which grades funds on “intangibles like corporate culture, board quality, manager incentives, fees and regulatory history.” In fact, many of the themes are almost identical. Here are more details of each component, taken from press releases and the official methodology:
Corporate Culture. Is the fund company focused on investing or gathering assets? Does the fund company foster a thoughtful, repeatable investment process?
Board Quality. Does the board consistently act in shareholders? best interest? Do the independent directors have meaningful investments in the fund? Is the board led by an independent chairman, and are 75% of the directors independent?
Fees. Morningstar now assesses funds solely on their current expense ratios and how those fees compare to their peers, and no longer considers the trend in fees.
Manager Incentives. Does the manager have a significant investment in the fund(s) he or she oversees? Do the compensation plans reward long-term performance or simply emphasize asset growth?
Regulatory Issues. Funds do not receive points toward their overall Stewardship Grade for simply following the law, and firms with poor regulatory histories will lose points.
Unfortunately, to actually get the exact grades of any specific fund, you have to subscribe to the Morningstar site at over $100 a year. Blah. But here is one useful tidbit:
Management companies with one or more funds at the top of the class include, in alphabetical order, Clipper, Columbia Acorn, Davis, Diamond Hill, Dodge & Cox, FPA Paramount, Longleaf Partners, Oakmark, Pennsylvania Mutual, Royce, Selected American, T. Rowe Price and the Vanguard Group.
I would much rather use this Stewardship rating to help assess active funds than the more popular (and separate) Morningstar “Star” Ratings, as that system continues to overweight recent past performance and offers questionable predictive abilities.
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$100 is pretty hefty for just some extra rankings. Anyone out there pay for the service? If so is it worth it? Seems like by Morningstar giving some of the managemnet companies you could just go in and check those companies and find which ones Morningstar gives a high star ranking to and go from there.
You may get these stewardship grades if you are lucky enough to have your tax dollars being put to good use. I live within close driving range of 4 -5 libraries that all carry Morningstar reports. These libraries also have internet access by entering your library card number. No way would I pay $100 for access to this while I am already indirectly paying for this service via taxes.
While I value M*’s website, I think it’s still pretty easy for most of us to figure out who’s good at what they do………
Vanguard
Fidelity
etc.
Since I’m a diehard Vanguard guy/Boglehead, I can’t imagine investing in any other company. They are simply geared toward the customer like none other.
I know Fidelity is good too, but I wonder how popular Fidelity would be today w/o possibly the greatest fund (Magellan) & possibly best fund manager (Lynch) to ever live??
Companies outside these big two???………….Dodge & Cox!! Again, once you read enough about the company and review their historic returns, they are simply (to me) the most amazing managed-fund company I have ever found.
I was once laughed at by family members for investing w/ Vanguard…….(these are the Mad Money types of the family, etc.)…….well……..I’m not even 40 yet and I am probably as well or BETTER off than they are in their 60’s!!!!!!!!!!!!!!!!
😉
Does anyone on this blog use the Morningstar Premimum Membership?
Last time I checked they were charging $16/month and $150/yr.
Assuming a 30K investment, the $150/yr fess is like a 0.5% “management fees”. Unless ofcourse u are in the 300K range of personal investments 🙂 then its like a .05%
If you are using the premium membership, could you please share your experience.
A reader actually kindly took the time to send me a copy of one of these Stewardship Grade reports today, and it’s actually pretty nice. It’s not just the grade but it explains the details about how the fund ranks for each component.
I personally have a morningstar membership right now, that is a one month membership for $15. I find the membership to be very helpful, but I generally only use it for one month periods at a time, and only about once a year. The membership is helpful, but not cost effective to keep in the long run.
Hi everyone. Several things I want to comment on, the posting and on several comments. First things first, I’ve been using Morningstar premium services for about a year now. It is about $15/mo, so I’m not sure what HairySwede was referring to as far $100 goes.
I agree with Jonathan that Stewardship grades actually seem more important than Morningstar star ratings, but those are useful too since they have analysts explaining exactly why each fund earned their stars, etc.
I disagree with Rob that you can just see which funds are good. He named Fidelity as being one of the great ones, but it’s really not. For the past several years managers have been tossed around between funds, so there is a short term fund tenure for many of these fund managers which makes difficult to predict how they’ll perform. Also, just because fund family is well-known for quality funds, it doesn’t mean that every fund it has is great. I’m a big fan ot T. Rowe Price funds, but even they have plenty of funds that I wouldn’t want to invest in, while Fidelity might have a comparable fund that performs better.
Now, I’m not here to promote Morningstar, I’m just saying you can’t take anything at face value and you have to do your research whether using Morningstar or not. Also, for those of you who wanted an opinion of someone who has used their premium services: 1) I really like their analyst reports for both mutual funds and stocks; 2) They have a powerful stock screener that beats any free screeners that you can find out there; 3) Mutual fund screener is very handy as well; 4) They have this nifty feature called X-Ray that dissects your mutual fund and stock portfolios to show your overall geographic and sector exposure, but of course I wouldn’t sign up for Morningstar just because of this; 5) I find the site overall very useful, although somewhat slow at time, it definitely helps with my research, but I treat their analysis more as a guidance than anything else.
If you guys have any other questions about MS, I’ll try to answer them.
I just pulled the $100 number from the original post but then realized it said over $100. Sorry about that.
Anyway, it seems like there is so much information out there than can be had for free like Ron says. Just a matter of putting in the extra work I suppose.