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Morningstar Study Confirms: Strong Stewardship Practices Help Predict Fund Performance, Survival

Report Also Names Top Average Grades Among Fund Families

CHICAGO, March 28, 2011—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today released the findings from its 2011 Mutual Fund Stewardship Grade research study, which evaluated more than 1,000 funds from more than 40 fund families on how well each fund treats its fund shareholders’ capital.

“The results of this study show a very strong correlation between good stewardship of capital and a positive investor experience,” said Laura Pavlenko Lutton, editorial director of fund research at Morningstar and one of the authors of the study. “Investors can use the Morningstar Stewardship Grade as a leading indicator of whether a fund will take good care of their money and put fund shareholders’ interests first.”

The study looked at how funds have performed since Morningstar first issued its Stewardship Grades in 2004 and again after the company revised its Stewardship methodology in 2007. It concluded that funds with high Stewardship Grades (those receiving grades of “A” or “B”) are very likely to survive in the long-term, and more likely to provide competitive risk-adjusted returns in the ensuing period. For purposes of the study, funds are considered successful if they have a Morningstar Rating of three stars or higher, a metric that broadly measures whether a fund’s shareholders have fared well relative to peer funds on a risk-adjusted basis. Funds were deemed unsuccessful if they received a Morningstar Rating of two stars or lower or if the funds did not survive.

“While we would never suggest that a fund’s Stewardship Grade should be the sole basis for making an investment decision, it can certainly help investors filter their choices,” Lutton said. “Funds with top Stewardship Grades are most likely to employ industry best practices and treat fund shareholders like owners, as opposed to treating them like just another dollar through the door.”

Morningstar uses five major criteria to arrive at a Stewardship Grade: the corporate culture of a fund’s parent organization; the quality of the board of directors overseeing the fund; the fund managers’ financial incentives; the fund’s fees; and the fund firm’s regulatory history. Morningstar analysts assign each component an individual grade, and combine the scores to provide an overall Stewardship Grade. Funds that are determined to be the best stewards of capital receive an “A” grade, while the worst receive an “F.” Morningstar currently assigns Stewardship Grades to more than 1,000 of the approximately 1,750 funds that its analysts actively follow.

The study found that of the funds Morningstar graded in 2004 and 2007:
• Almost all--about 99 percent--funds that received “A” Stewardship Grades survived;
• More than 80 percent of the funds earning grades of “A” or “B” in 2007 had competitive risk-adjusted returns relative to their peers;
• Approximately one-third of funds receiving an “F” grade in 2004 didn’t survive to today;
• About one-quarter of funds receiving a “D” grade were liquidated or merged away.

Other positive correlations include:
• Approximately 87 percent of funds that earned “A” grades for corporate culture in 2007 were successful in the ensuing period;
• Managers who have their own financial incentives aligned with fund shareholders had good results—more than 75 percent of the equity funds earning “A” grades in 2007 in the manager-incentive category were successful in the ensuing period;
• Funds with low fees had the best risk-adjusted returns, primarily over long-term periods.

Among all current fund evaluations, the most common Stewardship Grade is a “C,” which Morningstar assigns to 455 funds. On the high end of the scale, 90 funds currently earn an “A” overall grade and 359 funds receive a “B.” On the lower end, 145 funds currently receive a “D,” and just two funds receive an overall Stewardship Grade of “F.”

Morningstar’s study also calculated an average Stewardship Grade for all of the funds it grades within 44 different fund families. Six fund families currently earn an average overall Stewardship Grade of “A”: American Funds, Clipper, Davis, Diamond Hill, Dodge and Cox, and PRIMECAP. Average overall Stewardship Grades of “B” are assigned to another 16 fund families, and 17 fund families receive “C” grades. Five fund families receive “D” grades in the report. No fund family currently receives an average overall Stewardship Grade of “F.”

To see the complete study, please visit: http://global.morningstar.com/2011StewardshipGrades.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. 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 approximately 380,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 26 countries.


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©2011 Morningstar, Inc. All rights reserved.

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