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Tuesday, September 25, 2007

Making the Grade at Morningstar

News summary by MFWire's editors

Miss Morningstar has released its new grades for fund stewardship. Only two funds got perfect marks from the teacher: Clipper (CFIMX) and Selected American Shares D (SLADX). The rest fell somewhere on the grade curve between A and F. Six percent of funds got A's, 24 percent got B's, 47 percent got C's, 20 percent got D's, and 3 percent got F's.

Morningstar, Inc. , a leading provider of independent investment research, today released new Stewardship Grades for more than 1,000 mutual funds. Morningstar's analysis of stewardship, which the firm began in 2004, is designed to help investors research, identify, and compare fund managers and fund companies that do a good job-or a poor job-of aligning their interests with those of fund shareholders. Morningstar announced in June that it was enhancing its Stewardship Grades to further recognize fund companies that go above and beyond industry standards for governance.

The new grades, along with detailed analyst reports on the individual components of the scores, are now available to Premium Members of Morningstar.com, the company's investment Web site.

"We believe Morningstar is the only company that thoroughly examines a mutual fund's stewardship for fund investors. We consider the overall investment and sales culture of the fund firm, the quality of a fund's board of directors, manager compensation structure and the extent to which management invests in the firm's funds, the fees the fund charges to investors, and the fund firm's regulatory history," says Laura Pavlenko Lutton, senior mutual fund analyst and head of the Stewardship Grade committee at Morningstar. "We analyze all of this information and compile a grade to recognize firms that do more than just obey the law and follow industry norms."

Of the 1,000 funds graded under the new methodology, only two received perfect scores: Clipper (CFIMX) and Selected American Shares D (SLADX).

The grade breakdown under the new methodology:

As - 6%
Bs - 24%
Cs - 47%
Ds - 20%
Fs - 3%

The individual fund scores are available at http://www.morningstar.com/goto/AllStewardshipGrades.

The basic structure of the Stewardship Grade has not changed -- Morningstar fund analysts still assign a grade to a fund by examining Corporate Culture, Board Quality, Fees, Manager Incentives, and Regulatory History. What has changed are the underlying criteria used to evaluate four of the five sections (criteria for Manager Incentives remains the same) and the increased emphasis on Corporate Culture in determining the final grade.

Changes to the Stewardship Grade methodology include:

Corporate Culture Receives a Higher Weight. The section is still a subjective weighting of a firm's investing and business culture, but because Morningstar found that Corporate Culture sets the tone for the other

components it evaluates, it now drives 40% of the grade, whereas it drove 20% of the grade under the original system.

Fund Boards: A Higher Standard for Independence. Boards must have independent chairmen and 75% independent directors for full credit for independence. Morningstar no longer evaluates board members' workloads and there is now more emphasis on how well the board oversees the funds it governs.

Current Level of Fees, Not Fee Trends, Determines Expense Score. 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. Funds in the cheapest quintile of their peer groups receive an A in this section, and funds that are more expensive than 60% of their peers receive Fs.

Firms Lose Points for 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.

Analysts consider Morningstar Stewardship Grades in determining Fund Analyst Picks, which are subjective recommendations of funds that Morningstar analysts think have the greatest chance of success. Stewardship Grades differ from the Morningstar Rating for funds (the "star" rating), which is a quantitative assessment of a fund's past risk/reward profile. The Stewardship Grade uses some quantitative measures but is primarily a fund analyst's subjective assessment of a fund's commitment to shareholders' best interests. Morningstar also issues Stewardship Grades for almost 1,500 stocks, but the methodology is unrelated to that used for the Stewardship Grade for mutual funds.

For Morningstar's recent commentary on the Stewardship Grade, go to http://www.morningstar.com/goto/StewardshipFundSpy.

For a comprehensive overview of the Stewardship Grade methodology, go to http://global.morningstar.com/stewardshipgradefunds.

For a complimentary Premium Subscription to Morningstar.com, please email courtney.dobrow@morningstar.com.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in the United States and in major international markets. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 250,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 16 countries and minority ownership positions in companies based in three other countries.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This press release contains forward-looking statements. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," or "continue" or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements.

Other factors that could materially affect actual results, levels of activity, performance, or achievements can be found in Morningstar's filings with the Securities and Exchange Commission, including Morningstar's Annual Report on Form 10-K for the year ended Dec. 31, 2006. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in this press release reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise. 

Edited by: Erin Kello

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