Morningstar Advisor - June/July 2012 - (Page 7)

Letter From the Editor Stewardship Comes to the Fore Jerry Kerns A favorite slide of Don Phillips’, one that he frequently includes in his presentations to groups of financial planners, is titled “It Pays to Mind the Gap.” Shown below, it refers to the behavior gap, or the difference between a fund’s Investor Return, which is asset-weighted and shows what a typical investor actually earned in the fund, and its total return, which assumes investors hold the fund from the start of a time period to the end. Phillips’ slide convincingly shows the correlation between a fund family’s Investor Return and the amount of assets it attracts—the smaller the behavior gap, the larger the size of the firm’s inflows (the size of the bubbles). The correlation between flow size and Investor Return is more than twice that of asset size and total return. To Phillips, the message of the slide is clear: It pays for fund firms to do the things that give shareholders a good investing experience. This means offering funds with low costs, investment merit, and with a long-term focus. In a nutshell, successful fund companies are the ones that value stewardship over salesmanship. Stewardship has long played a role in how Morningstar’s analysts have evaluated mutual funds, but its importance has evolved. Early on, poor stewardship qualities such as high manager turnover and launching flavor-of-the-month funds were noted in written fund analyses. In 2004, Morningstar took a big step forward and quantified the process by launching Stewardship Grades for funds. Advisors and investors could quickly see to what degree a fund aligned its interests with its shareholders. Then in late 2011, Morningstar again pushed the envelope. It launched new Analyst Ratings, in which analysts evaluate funds not only on performance but also on the qualities of the people who run the funds, the parent fund company, investing process, and price—all key stewardship characteristics that affect the investor experience. Also, Morningstar improved its Stewardship Grade methodology, giving more weight to corporate culture and manager ownership, and grading fund families instead of individual funds. Analysts use this new firm-level data in their Analyst Ratings. Our Spotlight section (Page 36) goes into greater detail into all of these changes, and throughout the issue, you’ll also find examples of good stewardship in action, including Jeffrey Ptak’s In Practice piece about how stewardship offers insights into whether fund managers are committed to their investment discipline (“A Hedge Against Career Risk,” Page 28) and profile of a fund shop run by an investor who’s proven over and over that shareholders matter more than gathering assets (“Where Shareholders Ride First Class,” Page 56). Best on the Street  In May, The Wall Street Journal announced its annual “Best on the Street” list of Wall Street’s best stock-pickers. Six Morningstar equity analysts made it, which shows how far our equity research capabilities have come. Two of the winning analysts recently have appeared in Morningstar Advisor. Avi Feinberg participates in this issue’s Sector Rap on energy (“Natural Gas Reaches Capitulation,” Page 32), and Joung Park wrote a Gray Matters article in the April/May issue (“Central Banks Driving the Gold Rush, Page 64).             7

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2012

Morningstar Advisor - June/July 2012
Letter From the Editor
Be Worth Remarking About
How Important Is Stewardship?
From West Point to Points East
Where a Fund’s Secrets Lie
Getting Fund Directors on Board
Managers Prep for Housing Rebound
Four Picks for the Present
Investment Briefs
A Hedge Against Career Risk
Natural Gas Reaches Capitulation
Family Matters
How Good Stewardship Predicts Superior Performance
Stewardship Goes Back to the Fundamentals
On the Go for Fixed Income
Where Shareholders Ride First Class
Dangers Lurk in Exchange-Traded Notes
Stocks on Sale in a Strong Market
A Good Steward Is Easy to Find
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
Buffett Rule’s Biggest Losers

Morningstar Advisor - June/July 2012