While I was on vacation last week I attended a writers workshop in Guelph Morningstar Canada released a controversial report on mutual fund stewardship grades for the Canadian mutual fund industry. You can read Jim Daws report here. What wasnt covered in initial media reports was an attempt by the Investment Funds Institute of Canada to discourage Morningstar from releasing the report.

The industry needs more stewardship and less asset-gathering

The concept of stewardship is tied in with the idea of being a fiduciary: always doing what is best for the investor. Indeed, Wilfred Hahn incorporated the very phrase into the name of his ETF-based business: Hahn Investment Stewards.

Another BC-based firm that emphasizes this approach is Steadyhand Investment Funds Inc. which got the top stewardship score of eight in the survey. It was one of five firms that received an A grade, while none of the 27 firms it covered got a failing F. Some big firms, including IA Clarington and Desjardins, were not included in the survey.

MERs and corporate culture should be important to investors

According to a Morningstar release that quotes Morningstar president and CEO Scott Mackenzie [pictured above] the score is based on four components: corporate culture, manager incentives,  fees (MERs or Management Expense Ratios) and Regulatory history.

The Corporate Culture component hits at the heart of the stewardship issue: is the fund company in question focused on investing or on gathering assets? Do its best managers spend most of their careers there?

Just as relevant is the Fees section: companies with expensive funds got zero points on this measure while firms with MERs cheaper than 85% of their peers got two points. This makes a certain amount of sense since all other things being equal, the higher the MER, the more the drag on performance.

Steadyhand, Chou, Mawer & Capital International did best

After Steadyhand, the next best scores were 7.5, earned by  Chou Associates,  Capital International Asset Management and Mawer Investment Management. Leith Wheeler Investment Counsel and TD Asset Management Inc. got 6.5%, Invesco Trimark, McLean Budden and Manulife Mutual Funds 6.

Investors Group, Sceptre, National Bank did worst

The lowest scores were National Bank with 3, and Investors Group and Sceptre Investment Counsel at 3.5. Most of the big independent broker-sold firms were in between at around 4 or 5.

IFIC goes over Mackenzies head in bid to suppress reports release

A few days before Morningstar released the study, IFIC president and CEO Joanne De Laurentiis [pictured, right] sent to member firms a copy of a two-page letter addressed not to Mackenzie but Don Philips, president of Fund Research for Morningstar Inc. in Chicago.  In it, De Laurentiis expressed serious concerns with the firms planned issuance of the Stewardship grades.

It felt that Morningstars view is that firms that believe in advice and deliver investment products through the advisors should be penalized.  A second point slams the study for being qualitative and subjective, presenting no evidence of research into investor experience at all.

Why disclose fund manager comp if its not required?

Next, IFIC attacks Morningstar for its belief that fund companies should disclose fund manager compensation (including co-investment). Such disclosure is not a requirement in Canada and there are various views on whether fund managers should or should not invest personally in the funds they manage, she says.

She then complains that Morningstar is attempting to impose a new regulatory standard in place of the existing robust regulatory set of standards currently active in Canada.

She concludes that the new Stewardship Grades have no predictive value to investors and recommends that you not release this first study.

IFIC didnt get unanimous support from member firms

I understand that IFIC even sent this letter to fund companies that are not IFIC members, including influential C.I. Funds Inc which received a midling Stewardship Grade of 5.0.

Not all fund companies that are members agreed with the letter: as a result, rather than the usual statement that IFIC was acting on behalf of its member firms, the letter is signed only by De Laurentiis.

No doubt Morningstars process can be improved in future iterations but Id say this is a pretty good start for investors looking for guidance as to where to put their hard-earned money.