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Thursday, April 12, 2012

Does Stewardship Impact Mutual Fund Performance?

by: Erin Kello

Morningstar's new corporate culture ratings for mutual funds do not predict fund performance, according to a new study conducted by two finance professors at Pace University.

Aron Gottesman and Matthew Morey, finance professors at Pace’s Lubin School of Business, looked specifically at the ratings' ability to predicts risk-adjusted performance of domestic equity funds over the period 2005-2010.

“We find there is little significant evidence that corporate culture predicts better fund performance,” the Gottesman and Morey wrote. “Indeed, we find that no individual component of the Morningstar stewardship rating including board quality, fees, manager incentives and regulatory issues is able to consistently predict fund performance."


Company Press Release

NEW YORK, NY – April 11, 2012 -- Aron Gottesman and Matthew Morey, finance professors at Pace University’s Lubin School of Business, have conducted a new study to test if a mutual fund’s own corporate culture predicts fund performance.   

The study is the first to explicitly examine corporate culture as an aspect of fund governance, the researchers say.  

Using Morningstar’s corporate culture ratings for mutual funds, Gottesman and Morey examine the ability of these corporate culture ratings to predict risk-adjusted performance of domestic equity funds over the period 2005-2010.  

“We find there is little significant evidence that corporate culture predicts better fund performance,” the researchers write. “Indeed, we find that no individual component of the Morningstar stewardship rating including board quality, fees, manager incentives and regulatory issues is able to consistently predict fund performance.  

“Arguably the most important component of the Morningstar stewardship rating is fund corporate culture as it sets the tone for the entire operation of the fund,” they write. “Indeed, the culture of the fund conveys how well employees are treated, how the fund treats its own investors, and how well the fund communicates with its shareholders.”  

In the wake of the late-trading and market-timing scandals in 2003, there has been a great deal of interest in the governance of mutual fund companies. In response to this interest Morningstar, the well-known mutual fund data provider, created a stewardship rating in August 2004 to complement its well-known star rating.  

Unlike the star ratings, which focus only on past fund performance, the stewardship ratings examine five governance factors of the fund company itself: board quality, corporate culture, fees, manager incentives, and regulatory issues. The stewardship ratings essentially allow an investor to determine how well the fund company is taking care of its fiduciary responsibilities, say Gottesman and Morey.  

The research paper, “Mutual Fund Corporate Culture and Performance,” has been accepted for publication by Review of Financial Economics.  

For a copy of the paper, email wcaldwell@pace.edu.  

About the co-authors: Gottesman and Morey are co-authors of previous studies including "Morningstar Mutual Fund Ratings Redux" (2006), "Manager Education and Mutual Fund Performance" (2006), "Predicting Emerging Market Mutual Fund Performance" (2007), "Does Better Corporate Governance Result in Higher Market Valuations in Emerging Markets?" (2009), and "CEO Educational background and Firm Financial Performance" (2010). Their work has been cited by Financial Times, Forbes, New York Times, and Wall Street Journal.

  About the Lubin School of Business at Pace University: Globally recognized and prestigiously accredited, the Lubin School of Business integrates New York City’s business world into the experienced-based education of its students at Pace’s suburban and downtown campuses, implemented by the region’s largest co-op program, team-based learning, and customized career guidance. Its programs are designed to launch success-oriented graduates toward upwardly mobile careers.  www.pace.edu/lubin

   About Pace University: For 105 years Pace has educated thinking professionals by providing high quality education for the professions on a firm base of liberal learning amid the advantages of the New York metropolitan area. A private university, Pace has campuses in New York City and Westchester County, New York, enrolling nearly 13,000 students in bachelor’s, master’s, and doctoral programs in its Lubin School of Business, Dyson College of Arts and Sciences, College of Health Professions, School of Education, School of Law, and Seidenberg School of Computer Science and Information Systems. www.pace.edu
 

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