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Morningstar 2014 Stewardship Survey

Morningstar has released its 2014 Stewardship Survey, which provides both “Parent Ratings” and “Stewardship Grades” for funds.  Both ratings consider the same five criteria.  First is the corporate culture of the parent company.  The second is the quality of the board of directors overseeing the funds.  The third involves the fund managers’ financial incentives, and the fourth, the average fee level of the funds.  The fifth is the firm’s regulatory history.  The methodology relies on analysts’ quantitative and qualitative assessments of these components.

The report explains this methodology as follows: 

“To assess a firm’s Corporate Culture, for example, analysts determine whether the firm is focused primarily on serving fundholders well, placing their interests before the firm’s own corporate profits.  Some data, including manager retention and manager tenure, help an analyst make such assessments, but a qualitative analysis of the strength and depth of the investment team and of the firm’s distribution and product-development agenda plays an important role in arriving at a Corporate Culture grade for the firm.”

The report provides additional detail as to how the Fund Board Quality ratings are assigned:

Historically, Morningstar’s assessment of fund boards had some strict quantitative components, but beginning in 2011, the methodology shifted to be primarily qualitative.  Morningstar’s evaluation considers how well fund boards have served the mutual fund shareholders they represent at the bargaining table with the advisor.  Morningstar analysts routinely interview fund board directors at firms earning full Stewardship Grades, as well as those earning Parent ratings, to determine the board’s role in reviewing fund performance, negotiating expense ratios, signing off on new funds, closing capacity-constrained funds, and supporting the firm’s investment processes.

The 2014 report awards only four funds its top “A” grade for stewardship, with six funds garnering a “B” report and ten a “C” rating. 

The full report can be found here:  http://corporate.morningstar.com/us/documents/MutualFunds/WP_Equity_Stewardship_031914_FINAL.pdf