New measure an assessment of a company’s commitment to unitholders’ best interests

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Morningstar Research Inc.

Morningstar Research Inc. unveiled its new “Stewardship Grade” for fund firms on Tuesday. The measurement is designed to help investors identify and compare fund companies on how well they align their interests with those of fund unitholders.

In its review of 27 fund companies, Morningstar identified five as the best firms in terms of stewardship with an A grade: Beutel, Goodman & Company Ltd.; Capital International Asset Management (Canada), Inc.; Chou Associates Management Inc.; Mawer Investment Management Ltd.; and Steadyhand Investment Funds, Inc.

The new grades differ from the Morningstar’s “star” rating for funds, which is a quantitative assessment of a fund’s past performance, adjusted for risk. The Stewardship Grade uses some quantitative measures but is primarily a fund analyst’s subjective assessment of a fund firm’s commitment to unitholders’ best interests.

“With our introduction of the Stewardship Grade for fund firms, we’ve tried to capture some of the intangibles associated with making an investment decision,” says Scott Mackenzie, president and CEO of Morningstar Canada. “The grades aren’t designed to be “buy” or “sell” signals, but to help investors better understand the funds they invest in and help determine the difference between a great investment and one to avoid.”

Calculating the grades

The grades are primarily based on information compiled from public filings and the expertise of Morningstar’s fund analysts. Analysts evaluate four components when assigning a score for each fund company.

The Corporate Culture component rates how seriously a firm takes its fiduciary duty to its fund unitholders. Its maximum score is 4 points.

The Manager Incentives component measures whether a firm’s incentive policies effectively align management’s interests with those of unitholders, and whether the managers invest in the funds they run.

The Fees component is an evaluation of a fund company’s management expense ratios (MERs) relative to those of other firms; with some consideration given to the distribution model of the company.

The Regulatory History component is based on an examination of any regulatory issues at the fund company, normally focusing on the past seven years.

To arrive at a fund company’s grade, analysts tally points across all four components. The maximum score is 8 points. The Corporate Culture component’s maximum score is 4 points; the Manager Incentives and Fees components’ maximum score is 2 points; the Regulatory History component’s maximum score is 0 points, and the lowest possible score is -2 points.

The overall grade is based on the sum of the four component scores, and each fund company is assigned a letter grade from A (best) to F (worst):

- A: 7.5 to 8 points;

- B: 5.5 to 7 points;

- C: 3.5 to 5 points;

- D: 1.5 to 3 points; and

- F: fewer than 1.5 points.

Morningstar says the grades will be updated annually, but it reserves the right to change a firm’s grade at any time.

The grades and accompanying analyst reports are currently available for free on Morningstar.ca, Morningstar Canada’s investment information website for individual investors. Both will become part of the Premium Membership in September, along with a number of new features Morningstar announced Tuesday.