Morningstar has updated its Stewardship Grades for the second time since June 2010.
This year, two fund companies, Capital International Asset Management (Canada), Inc. and Steadyhand Investment Funds, Inc. received the top overall grade of A. In 2011, four fund companies received As.
Ten companies received Bs and 11 received Cs in 2012, compared to 7 and 13, respectively, in 2011.
Three received Ds in 2012 (AGF Management Ltd., BMO Investments Inc., and Sprott Asset Management Inc.), while only two received that grade last year (Fiera Sceptre and Sprott).
The 2012 assessment covers 26 mutual-fund companies, the same as 2011.
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The grade is meant to help investors assess funds based on the degree to which the management companies offering the funds have its interests aligned with those of investors, says Morningstar.
The methodology is also meant to examine whether investors can expect their interests to be protected from potentially conflicting interests of the fund company.
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Morningstar’s Stewardship Grade assesses each fund company on four criteria:
Corporate culture: a qualitative assessment of how much a fund company puts investors first, and seems poised for success over the long term. Factors include low manager turnover, lack of gimmicky product launches, and clear communication with investors through their web sites and regulatory filings.
Manager incentives: whether managers are rewarded for producing strong long-term, risk-adjusted returns. Red flags in this category include compensation tied to asset growth, or rewards for short-term performance. Morningstar also considers manager co-investment, or how much, as a percentage of salary, the managers have personally invested in the fund family.
Fees: a comparison both on an absolute and asset-weighted basis of each company’s management expense ratios for its funds, compared to competition within their respective distribution channels. Consideration is also given to the availability of both advisor-sold and direct-investor fund series, as well as any low-fee funds the company offers.
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Regulatory issues: review of any regulatory penalties or missteps of particular concern.