Morningstar Advisor - Summer 2007 - (Page 12)

Gray Matters Our Stewardship Test Gets Tougher We revamped the methodology. Now, it will be harder for your clients’ funds to get A’s. by Laura Pavlenko Lutton When it came to Morningstar’s Stewardship Grade for mutual funds, grade inflation was never an issue. But to better recognize the industry’s best caretakers of capital, we’re making a few changes to the methodology. Advisors and other investors can rest assured that only the top students of stewardship will ace the test. The basic structure of the grades remains intact. The grade is still based on our fund analysts’ evaluation of five main components: corporate culture, fund board independence, fund manager incentives, fees, and regulatory history. Under the improved methodology, however, we will no longer equal-weight all five sections when deter- mining a fund’s final Stewardship Grade. We think not all areas have the same influence over a firm’s governance practices. We’re also altering some of the criteria our analysts use to evaluate three of the components. We’re making these changes so our Stewardship Grades continue to reflect the industry’s best governance practices, which have evolved since August 2004, when we first launched the grades. Our analysts will spend the coming months re-evaluating about 1,000 funds on our coverage list, and we plan to launch new grades for those funds in the fall. You can find the Stewardship Grade in Morningstar Principia and Advisor Workstation Office Edition. Corporate Culture Is Key previously. We’ve increasingly found that a firm’s corporate culture is the biggest indicator of whether its funds serve investors well. Our evaluation of a fund shop’s corporate culture isn’t changing. We’ll still look at whether a firm’s culture is sales-oriented or investment-oriented. We also like firms that treat their fundholders as owners and candidly explain in semiannual and annual reports what went right and wrong with a fund’s investment process. The stability of a fund company’s investment personnel can also be telling. We’ve found that the healthiest, most investment-centered cultures are able to attract and retain strong investors over time. By giving more weight to corporate culture, funds run by the best investment-oriented firms may see their overall Stewardship Grades improve, while those with average (or worse) cultures may see their overall grades decline. The most significant change we’re making under the improved methodology is to doubleweight the corporate culture component when determining a fund’s overall Stewardship Grade. Corporate culture could represent up to 40% of the fund’s overall grade, up from 20% 12 Morningstar Advisor Summer 2007

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.