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Morningstar Releases 2015 Stewardship Survey Results

Morningstar recently released its second annual U.S. Mutual Fund Industry Stewardship Survey. The report examines four firm-wide data points: manager tenure; manager retention rate; manager ownership of fund shares; and fee level. According to the report, higher manager retention, longer manager tenure, higher manager ownership in funds, and lower fees all point to superior Morningstar Success Ratios, a measure of fund survival and outperformance.

Morningstar uses the data explored in its survey to inform its Stewardship grades as well as its analyst ratings.  In assigning analyst ratings to individual funds, Morningstar relies heavily on the “parent pillar” “[b]ecause we have found a link between strong stewardship practices and better outcomes for fundholders.” The “parent pillar” measures the quality of the fund’s adviser and board. The survey found that funds with positive parent pillar ratings had risk-adjusted success ratios of 50, 55, and 54 percent for 3-year, 5-year, and 10-year horizons, compared to 43, 39, and 38 for neutral ratings and 33, 30, and 20 percent for negative ratings. Bridget Hughes of Morningstar commented that “Across the U.S. asset management industry, our findings reinforce our long-held belief that stewardship matters and strong stewards produce better outcomes for fund investors.”

With respect to manager tenure, the report notes that the average portfolio manager began at their current fund after the 2008 crisis, a finding made less surprising by the fact that nearly a third of all funds are less than six years old. Morningstar also found that firms with average manager tenure of greater than fifteen years generally outperform those with average tenure of six years or less. The study also found that firms with low portfolio manager retention rates preformed significantly worse over a ten-year period and suggested that the poor performance may be driving the lower retention rates.

The report notes a higher rate of managers’ investments in their own funds correlates with higher performance on three, five, and ten-year horizons when compared to firms with lower rates of manager investment. Further, 132 of the 800 firms covered in the survey had no manager investment in funds at all.

Morningstar found that the success ratio of funds that it classified as having generally low fees were nearly double those with generally high fees on a three-year horizon and more than triple on a ten-year horizon. The report also notes that the asset-weighted average expense ratio fell from 0.76 percent to 0.64 percent over the past five years.

The full report, including additional data, can be found here. Morningstar has also scheduled a webinar for July 29 at 11a.m. EST to discuss the findings (registration).