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By Christopher Davis and Ashley Redmond | 04-08-2014

Best stewards of investor money

Only three fund companies receive the top-rated "A" Stewardship Grade, says director of fund analysis, Christopher Davis.

Ashley Redmond: Welcome to Morningstar's Best Ideas Week. I am Ashley Redmond for and I am here with Director of Fund Analysis Christopher Davis.

Christopher, thanks so much for joining me.

Christopher Davis: Thanks for having me Ashley.

Redmond: Today we are going to talk about stewardship. Stewardship is often described as an ethic that involves the responsible planning and management of resources. And this can be applied to various fields, such as the environment. But here at Morningstar it's an integral part of our fund analysis. So, why does stewardship really matter?

Davis: Well, let's say we were looking at a wild life conservancy. I would ask does an organization do a good job of taking care of its lands? The animals that it's trying to protect and so on. Well, we are asking a similar sort of question in the stewardship realm. When we are analyzing funds and fund companies, we ask the question do they manage this firm for the best interest of their clients? The fund unitholder.

Redmond: We rate fund companies on stewardship and assign grades and just like in school an A is the best. So, what are some fund companies that have an A grade?

Davis: Well we give A’s to just three firms. And we cover almost two dozen firms for these purposes. So, just three make the grade: Steadyhand, Capital Research, as well as Mawer Investment Management. If we're going to use the school analogy here, we look at a few different factors and the most important is that we examine the firm's corporate culture. We ask, does this firm really exist and operate for the benefit of the unit holder? Or is it a sales driven firm that is out there just to make a quick buck and often make a buck at the expense of the unitholder. We also look at the extent of the financial alignment between the fund managers and the unitholder. We really favour firms where managers eat their own cooking and invest in funds that they oversee.

Redmond: For investors watching [regarding] the graph that just came up on the screen you’ll notice that the overall grade is A. But we have other categories such as fees and you'll notice with Mawer that they actually have a C in the fees category.

Davis: Right, and you can get an A even if you don’t get every question right on the test. Mawer doesn’t necessarily stand out on fees and this is when you compare Mawer to other shops that cater to do-it-yourself investors. Capital Research is as an example of a firm that sells to financial advisors. With Mawer you go directly to them if you want to buy. So, when you look at their fees they are not particularly awful, but they don’t stand out. So that’s an area of improvement for them, overall great stewards but not perfect stewards.

Redmond: Let’s look past these three companies. Are there any companies that stand out where they are not quite rated A yet, but they are really making strides towards that.

Davis: Well I can think of one firm, AGF. I think they are a long way from an A, but they do have some industry leading practices. For example, this year they mandated that all of their portfolio managers invest in the funds that they oversee and they used the criteria that Morningstar uses to assess manager co-investment. So, to get an A in the manager co-investment department your employees have to have more than twice their investible net worth invested in the firm’s funds and so that’s the standard that AGF is going to be living up to. That’s one example.

Brandes Investment Partners also instituted a mandatory co-investment policy. I’d also like to give some props to Mackenzie, BlackRock and Trimark who launched what they call D-series funds and these are fund share classes that are geared towards DIY investors. And one of the great injustices of the Canadian market place is that DIY investors are all too frequently paying for advice that they aren’t getting. So these firms exhibited some leadership in giving DIY investors some options.

Redmond: For investors, how should they use stewardship grades and appropriately apply them to their research and their portfolio?

Davis: Well it's an integral part of our process and I think it should be an integral part of an investor’s process. If you are partnering up with anybody, whether it be in business or otherwise you are going to partner with somebody you trust. And to me the stewardship grade is one of the best measures of trustworthiness. You want to partner with somebody whose interests are aligned with yours and A-stewards and B-stewards for that matter have their interests reasonably well aligned with you the unitholder and I think that’s what you should seek out.

Redmond: Makes sense thanks Chris.

Davis: Thanks.

Redmond: To find out more on Morningstar Best Ideas Theme Week visit the home page of