Morningstar’s Stewardship Grade for funds goes beyond the usual analysis of strategy, risk, and return. The Stewardship Grade allows investors and advisors to assess funds based on factors that we believe influence the following:
The manner in which funds are run;
The degree to which the management company’s and fund board’s interests are aligned with fund shareholders;
The degree to which shareholders can expect their interests to be protected from potentially conflicting interests of the management company.
We assign each fund a letter grade from A (best) to F (worst). Funds are graded on an absolute basis. There is no “curve.”
Morningstar analysts' evaluation of five factors determine the grade for each fund:
Morningstar Corporate Culture Grade (0 to 5 points)
Morningstar Manager Incentives Grade (0 to 3 points)
Morningstar Fees Grade (0 to 2 points)
Morningstar Regulatory History Grade (0 to 2 points)
Morningstar Board Quality Grade (-2 to 0 points)
We assign each fund's overall letter grade as follows:
A: 12 to 10.5 points
B: 10.25 to 7.5 points
C: 7.25 to 4.5 points
D: 4.25 to 1.5 points
F: 1.25 points or fewer
For ease of use, we translate funds' scores for each of the five individual factors into the following qualitative terms on Morningstar.com:
Excellent = 2 points
Good = 1.5 points
Fair = 1 point
Poor = 0.5 point
Very Poor = 0 points and below
Note: Morningstar's Stewardship Grade for funds is entirely different from the Morningstar Rating for funds, commonly known as the star rating. There is no relationship between the two.
Corporate Culture
Firms that exhibit the industry's most investor-focused corporate cultures earn full credit, or an A grade, for this component. Those that exceed the industry standard but do not demonstrate all of the industry's best practices earn B's. Firms with standard corporate cultures earn C's, while those trailing the industry norms earn D's or F's. Those letter grades translate into the following points toward a fund firm's overall grade:
Manager Incentives
The points earned for Manager Incentives will be largely driven by the percentage of the firm's fund assets where at least one of a fund's managers has invested more than $1 million in fund shares (the highest ownership range reported to the SEC). Fund firms with more than or equal to 80% of their fund assets meeting this criterion are eligible for full credit, or an A, in this section. Firms with 60% to 79% of their assets meeting the requirement are eligible for a B, while firms with 40% to 59% of assets in funds with manager investment exceeding $1 million may receive a C. Fund firms in the 20% to 39% of assets range may earn a D, while those below 19% of assets with top-tier manager investment may receive an F.
Morningstar analysts may raise a fund firm's score and letter grade if the firm's managercompensation plan, as described in the funds' Statements of Additional Information, exceeds the industry standard of aligning the fund managers' own financial incentives with those of shareholders. (Morningstar has observed that the most shareholder-friendly compensation plans are those that tie the majority of the managers' pay to delivering strong long-term returns 10 for fundholders.) Similarly, fund firms with pay plans that fall short of the industry standard may have their Manager Incentives grade lowered. The final letter grades correspond with these points toward the fund firm's overall Stewardship Grade:
Fees
Morningstar awards credit in the Fees section based on a straight average of the fund firm's Morningstar Fee Level Percentile, which is based on a comparison of funds with similar investment objectives and share class structures. The Fees grade depends on the quintile where the average percentile falls. Fund firms with average fee rank percentiles from 1 to 20 earn an A; those with average ranks of 21 to 40 earn B's; those with average ranks of 41 to 60 earn C's; those with average ranks of 61 through 80 earn D's; and those with average ranks exceeding 81 earn F's. The final letter grades correspond with these points toward the fund firm's overall Stewardship Grade:
Regulatory History
The maximum score for the Regulatory History grade will be zero, but up to 2 points may be deducted from the fund firm's overall Stewardship Grade for those with serious regulatory violations. Scores may be raised back to zero over time as firms demonstrate better compliance controls. This section of the methodology will not carry a letter grade. Firms that have been compliant will earn Neutral ratings; those with points deducted will earn Negative ratings.
Board Quality
Grades for this section are awarded based on whether the fund board has served shareholders' interests well, as determined by a comprehensive analysis by Morningstar's analysts. Boards that lead the industry with respect to serving shareholders well earn A's. Those that exceed the industry standard but don't incorporate all best practices earn B's. Fund boards with standard governance earn C's, while those trailing the industry norms earn D's or F's.
The letter grades translate into the following points toward a fund firm's overall grade:
See Also: