Fund Performance Follows Stewardship
Morningstar analyst David Kathman says investors shouldn't buy a fund based solely on its stewardship grade. But he notes that funds with top grades have generally done better than lower-ranked competitors. "In the last several years, funds that invest for the long-term have outperformed funds with short-term focuses," he says.
Some of the Morningstar criteria are subjective, and many investors may disagree with the scores. But the general approach is sound. Before buying any funds, investors should consider the Morningstar criteria. The goal should be to find fund managers who can be viewed as trusted business partners.
Of the half dozen criteria considered by Morningstar, the most important may be for fees. Morningstar gives top grades to funds with expense ratios that fall in the cheapest 20% of their categories. Funds in the most expensive 40% get failing marks.
The emphasis on fees is warranted. In order to be good fiduciaries, fund boards should insist on low fees. Because expense ratios are subtracted from returns, funds with low fees have a big advantage over competitors. Funds that gouge investors may trail the pack.Funds are also graded based on manager incentives. The Morningstar system prefers portfolio managers who have at least $1 million or one-third of their liquid assets invested in their own funds. Managers who have a stake in their funds will pay close attention to the welfare of shareholders, the thinking goes. To find data on the investments of portfolio managers, check statements of additional information, which are available on many fund Web sites.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV