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Top Rated Fund Families: A Morningstar Report Card

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The fund industry’s biggest firms control more than two-thirds of the industry’s mutual fund assets. But, of course, these fund groups don’t have the same management practices, manager tenure or investment performance.

Morningstar researchers released a study Tuesday that shows how the largest funds vary in these and other attributes.

“Not all of these industry leaders are top caretakers of capital,” the group says. Plus, there are big differences in the fees they charge.

“The study found that among the top-20 firms, those with stronger stewardship practices have delivered better outcomes for fundholders,” said authors Bridget Hughes, associate director of stewardship, and Laura Pavlenko Lutton, director of fund-of-funds research, in their report.

Morningstar’s stewardship grades entail factors like corporate culture, fund board quality, portfolio manager incentives, fees and regulatory history. The success ratios consider how many share classes a fund firm offered at the beginning of a measurement period; Morningstar analysts then tally how many share classes both survived and outperformed their peers, based on category rank and a risk-adjusted category rank.

Read on to see which 10 fund families earned a C, six firms received a B and four fund groups were rated A.

JPMorgan funds get a C in stewardship from Morningstar. (Photo: AP)‘C’ Graded Fund Families

Half of the industry’s largest firms get C Stewardship Grades, which Morningstar considers to be the “industry standard:” American Century, BlackRock, Columbia, Janus, John Hancock, JPMorgan, Lord Abbett, Oppenheimer, Principal and Wells Fargo Advantage Funds.

“While there may be pockets of relative strength within these firms’ funds, the stewardship grade measures the fundholder experience across the firm’s funds,” explained Hughes and Pavlenko Lutton. “On average, the firm-level data at the C stewards are worse than those of the firms earning A and B grades, though in some cases, like the average five-year manager-retention rate, the differences between these small peer groups can be quite slim.”

In general, the C stewards have lower Morningstar Success Ratios. None gave longer-term success ratios of 50% or higher, which means that fewer than half of their funds both survived and outperformed relative to category peers on a straight-performance or risk-adjusted basis.

Still, BlackRock, Columbia and Wells Fargo Advantage have gone through corporate mergers during the past 10 years, which impacts their success ratios.

“Firms that merge funds away are at a disadvantage, because they have fewer share classes at the end of the period, which drags the ratio down regardless of how well the surviving share classes performed,” the Morningstar experts said.

PIMCO's Bill Gross, left, at Schwab Impact with Liz Ann Sonders and Tyler Mathisen.‘B’ Graded Fund Families

The six firms receiving B stewardship grades exceed the industry’s standard for care of capital, according to Morningstar: Dimensional Fund Advisors, Fidelity, Franklin Templeton, Invesco, MFS and PIMCO.

“All have notable strengths,” the researchers explained, “but a few weaknesses that surface in the data prevent them from receiving Stewardship Grades of A.”

DFA has no manager with more than $1 million invested in a single strategy, they point out, “though managers at the firm are named to multiple offerings and their combined ownership — and exposure to the firm’s enhanced-index strategies — may exceed $1 million. DFA looks much stronger when it comes to fees, landing in the industry’s lowest decile for firm-level fee average.”

Morningstar adds that Fidelity’s manager-tenure numbers are the weakest among the B stewards, “which is a symptom of some of the performance challenges at the firm’s equity funds and its tendency over the years to rotate managers through its funds.” Still, its offerings are competitively priced, and manager ownership of fund shares has been improving.

As of Jan. 31, the final firm earning a B is PIMCO.

“It has launched several new funds in recent years as the firm has branched away from its core bond funds and into equities and multiasset strategies,” the Morningstar report explained. “Such moves can depress a firm’s equal-weighted manager-tenure figure, but the firm’s asset-weighted manager-tenure average reflects the importance (in terms of size) of flagship PIMCO Total Return and that strategy’s long-tenured lead manager, Bill Gross.”

(Morningstar says it lowered PIMCO’s Stewardship Grade on March 18 to a C from a B mainly because of senior-level departures at the firm, but the research and work on this report was completed before that date.)

Vanguard founder John Bogle (photo: Bloomberg)‘A’ Graded Fund Families

Only four firms earn A stewardship grades — thanks to longer-tenured managers, higher longer-term manager-retention rates, higher manager ownership of fund shares, and lower fees: American Funds, Dodge & Cox, T. Rowe Price and Vanguard.

“They also have been more successful, as measured by the Morningstar Success Ratios and Morningstar Risk-Adjusted Success Ratios,” the report noted.

Vanguard charges “rock-bottom fees” that help bring the peer group’s average down. “What’s more, the firm’s lineup of funds is largely passive, and indexed funds have outperformed actively managed funds in recent years, which is a boost to the success ratios. The firm’s actively managed funds have also been winners,” said Hughes and Pavlenko Lutton.

American Funds, which “suffered the worst performance of the four firms from a success-ratio standpoint,” still beats the typical firm earning a B or C stewardship grade—especially due to asset-weighted manager tenure and manager ownership of fund shares.

Morningstar concludes that fund investors “would be wise to consider a firm’s stewardship metrics when picking an investment, be it a single fund or suite of investments.”

While a firm’s stewardship profile doesn’t have to be the only determinant of a fund’s long-term success, the researchers say, the data suggest “that partnering with strong stewards tips the odds in fundholders’ favor.”

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