Morningstar Advisor - Summer 2007 - 14

Gray Matters Taking Rule-Breakers to Task We’re also changing the scoring for the regulatory history component of the grade. As is true with corporate culture, we aren’t altering our evaluation of a firm’s track record with regulators: We examine whether funds have been accused of wrongdoing in recent years. But rather than grant funds credit toward their final Stewardship Grade for simply following industry regulations, the maximum score for this section will be 0 points. Funds that have run afoul with regulators stand to have points subtracted from their regulatory score. We think this change reflects our tougher stance on stewardship and prevents funds from earning points for doing what should be a given—following the law. Independent Boards Are Best take other shareholder-friendly actions. Under the improved methodology, half of the fund board’s score will depend on whether it has served shareholders well. We will no longer consider the number of funds a board oversees as a criterion. In the end, we think the board’s results for shareholders matter more than the specific number of funds they oversee, and we’re adjusting our methodology accordingly. Lower Fees Lead to Better Returns The third methodology change relates to our evaluation of the fund board of directors. To receive full credit for the board independence component, fund boards must be led by independent chairmen and governed by a board with a supermajority (at least 75%) of independent directors. The Securities and Exchange Commission has proposed a similar requirement for fund boards, but to date, the commission has not enforced the measure. We think highly independent boards are in shareholders’ best interest because interested chairmen and directors cannot escape the conflicts of interest between the asset manager and the fund shareholders. For example, the board approves a fund’s fee structure, and affiliates of the asset manager may be more likely to approve higher fees that could benefit the asset manager, while shareholders would clearly benefit from lower fees. Under the new methodology, we also will put more emphasis on whether a fund board is serving shareholders well. Currently, one fourth of the fund board component considers whether directors negotiate fair fees, close funds at reasonable asset levels, and Our fees component is also getting a makeover. Much of our research over the years has demonstrated a clear link between better fund performance and lower fees. Our most recent study of the issue showed that funds with fees that are higher than the peergroup norm have been very likely to underperform over the long term. We’ve embraced that concept—and going forward— funds with fees in the lowest 20% of their peer group will score the best in this section, and those with fees in the two most-expensive peer-group quintiles will get no credit. We’ll no longer consider a fund’s fee trend, because we think the fund’s relative cost today does far more to determine the fund’s long-term success. Using the Grades to Pick Funds Save It for Later (It’s Not as Hard as You Think) by Peng Chen Q: How do I determine a savings rate for my client to fund a comfortable retirement? A: To determine your client’s savings rate, you need to answer three basic questions. 1 2 How much does your client need to live on each year in retirement? How much money does your client need to accumulate to fund that standard of living? What savings rate does it take to get there? We encourage advisors to use this measure alongside our tools designed to evaluate funds’ investment processes, including Morningstar’s fund analyses and the Morningstar Rating (also known as the star rating). Taken together, we think advisors can harness a powerful combination and make better investment decisions for their clients. K 3 We’ll address each question using new research by Roger Ibbotson, James Xiong, Robert Kreitler, Charles Kreitler, and myself. How much will my client need to live on each year in retirement? Laura Pavlenko Lutton is a senior mutual fund analyst with Morningstar. For more on Morningstar’s Stewardship Grade, download our fact sheet at http://MorningstarAdvisor.com/ uploaded/pdf/Stewardship.pdf Not as much as most people think. The standard answer is about 80% of a person’s gross pre-retirement income. So a client earning $100,000 when she retired at age 65 would need $80,000 per year for the rest of her life. But what if the client were saving 10% per year for retirement? That means she was only living on $90,000, so a more accurate estimate of what she might require in retire- 14 Morningstar Advisor Summer 2007
http://MorningstarAdvisor.com/uploaded/pdf/Stewardship.pdf http://MorningstarAdvisor.com/uploaded/pdf/Stewardship.pdf

Morningstar Advisor - Summer 2007

Table of Contents 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 - Intro
Morningstar Advisor - Summer 2007 - Morningstar Advisor - Summer 2007
Morningstar Advisor - Summer 2007 - Cover2
Morningstar Advisor - Summer 2007 - Contents
Morningstar Advisor - Summer 2007 - 2
Morningstar Advisor - Summer 2007 - 3
Morningstar Advisor - Summer 2007 - 4
Morningstar Advisor - Summer 2007 - Letter from the Publisher
Morningstar Advisor - Summer 2007 - 6
Morningstar Advisor - Summer 2007 - 7
Morningstar Advisor - Summer 2007 - Get to Know the Bond “All-Stars”
Morningstar Advisor - Summer 2007 - 9
Morningstar Advisor - Summer 2007 - Research Briefs
Morningstar Advisor - Summer 2007 - 11
Morningstar Advisor - Summer 2007 - Our Stewardship Test Gets Tougher
Morningstar Advisor - Summer 2007 - 13
Morningstar Advisor - Summer 2007 - Save It for Later
Morningstar Advisor - Summer 2007 - 15
Morningstar Advisor - Summer 2007 - Too Many Oranges
Morningstar Advisor - Summer 2007 - 17
Morningstar Advisor - Summer 2007 - Best of Both Worlds
Morningstar Advisor - Summer 2007 - 19
Morningstar Advisor - Summer 2007 - 20
Morningstar Advisor - Summer 2007 - No Two Clients Are Alike
Morningstar Advisor - Summer 2007 - When It Comes to VAs, It’s Seller Beware
Morningstar Advisor - Summer 2007 - 23
Morningstar Advisor - Summer 2007 - 24
Morningstar Advisor - Summer 2007 - 25
Morningstar Advisor - Summer 2007 - 26
Morningstar Advisor - Summer 2007 - 27
Morningstar Advisor - Summer 2007 - 28
Morningstar Advisor - Summer 2007 - Hands On: Finding the Suitable Fund Share Class for Your Client
Morningstar Advisor - Summer 2007 - 30
Morningstar Advisor - Summer 2007 - 31
Morningstar Advisor - Summer 2007 - 32
Morningstar Advisor - Summer 2007 - 33
Morningstar Advisor - Summer 2007 - Fund Style Can Drift Off Course
Morningstar Advisor - Summer 2007 - 35
Morningstar Advisor - Summer 2007 - 36
Morningstar Advisor - Summer 2007 - Sticking to Their Style, Through Thick and Thin
Morningstar Advisor - Summer 2007 - 38
Morningstar Advisor - Summer 2007 - 39
Morningstar Advisor - Summer 2007 - 40
Morningstar Advisor - Summer 2007 - 41
Morningstar Advisor - Summer 2007 - 42
Morningstar Advisor - Summer 2007 - Marathon Man
Morningstar Advisor - Summer 2007 - 44
Morningstar Advisor - Summer 2007 - 45
Morningstar Advisor - Summer 2007 - 46
Morningstar Advisor - Summer 2007 - 47
Morningstar Advisor - Summer 2007 - Growth, With a Chaser
Morningstar Advisor - Summer 2007 - 49
Morningstar Advisor - Summer 2007 - 50
Morningstar Advisor - Summer 2007 - 51
Morningstar Advisor - Summer 2007 - A Menu of Ideas to Fill Five Market Baskets
Morningstar Advisor - Summer 2007 - 53
Morningstar Advisor - Summer 2007 - 54
Morningstar Advisor - Summer 2007 - 55
Morningstar Advisor - Summer 2007 - 56
Morningstar Advisor - Summer 2007 - 57
Morningstar Advisor - Summer 2007 - Funds: Finding Funds with Conviction
Morningstar Advisor - Summer 2007 - 59
Morningstar Advisor - Summer 2007 - Stocks: So You Say You Want Income?
Morningstar Advisor - Summer 2007 - 61
Morningstar Advisor - Summer 2007 - 62
Morningstar Advisor - Summer 2007 - All Eyes on China
Morningstar Advisor - Summer 2007 - 64
Morningstar Advisor - Summer 2007 - 65
Morningstar Advisor - Summer 2007 - 66
Morningstar Advisor - Summer 2007 - 67
Morningstar Advisor - Summer 2007 - Mutual Fund Analyst Picks
Morningstar Advisor - Summer 2007 - 69
Morningstar Advisor - Summer 2007 - 70
Morningstar Advisor - Summer 2007 - 71
Morningstar Advisor - Summer 2007 - Undervalued Stocks
Morningstar Advisor - Summer 2007 - 73
Morningstar Advisor - Summer 2007 - Most Popular Variable Annuities
Morningstar Advisor - Summer 2007 - 75
Morningstar Advisor - Summer 2007 - What’s New at Morningstar and on the Web
Morningstar Advisor - Summer 2007 - 77
Morningstar Advisor - Summer 2007 - 78
Morningstar Advisor - Summer 2007 - 79
Morningstar Advisor - Summer 2007 - The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Cover3
Morningstar Advisor - Summer 2007 - Cover4
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