Are some fund firms better than others? Morningstar's latest Top 100 Fund Families report looks at how fund groups are performing at a company level to find out.
When Morningstar evaluates fund families, we strive to identify which firms are in business to maximise their own profits, as opposed to firms that build a relationship with their investors. In our view, firms that put investors first and align their interests with their shareholders will succeed in the long run.
In addition to a fund company’s regulatory history, Morningstar’s research considers:
• Corporate culture: Morningstar's analysts assess this primarily on a qualitative basis through regular on-site due-diligence visits and meetings with senior management and others in important roles. The strongest corporate cultures exhibit a clear mission to put investors first and are able to attract and retain professionals who can execute that goal.
• Alignment: Analysts evaluate whether portfolio managers' financial interests are aligned with those of investors and consider fund companies’ approach toward the fees they charge investors who have increasingly sought out lower-cost options.
We analyse how the largest fund families in Europe practice these principles in the “Fund Family 100.” The semi-annual report launched in the first quarter of 2019, and this marks its third edition.
The report compares the largest 100 fund families (measured by assets under management for funds available for sale across Europe) across key metrics, such as manager retention and tenure, quality of the fund range, fees, and its Morningstar Sustainability Rating. Here we round up some of our key findings:
Top-Rated Fund Families
Morningstar’s Parent Rating is one of three pillars included in the Morningstar Analyst Rating. Among the firms with the highest percentage of medalist share classes, all top 10 fund families received a Parent Pillar Rating of Above Average or High. The maximum rating of High has been awarded to Vanguard, Dimensional, and T. Rowe Price. As shown on the chart below, the top two spots are held by Fundsmith and Vanguard.
• With 96% of its assets held in medalist funds, Fundsmith stands out in this group. However, it's worth pointing out that the group has just three strategies, one of which - Fundsmith Equity - has a Gold Morningstar Analyst Rating and more than £18 billion of assets under management. This boutique set up is difficult to compare with the likes of, say, iShares, which has hundreds of funds in its range.
• Vanguard, at a larger scale, embodies investor-friendly practices through its responsible fund-capacity management approach and low-cost fees policy. The firm is the third-cheapest asset manager according to our data, with an average net expense ratio of 9 basis points and offers a high-quality fund range, which scores above 80% in three-, five-, and 10-year success ratios.
Fund Families and Manager Tenure
Average manager tenure is a measure of team stability. The average portfolio-manager tenure stood at 6.8 years, based on funds available for sale in Europe offered by the top 100 asset managers we reviewed as of April 2020. Top firms included Comgest, MFS, and Jupiter, which receive an Above Average Parent Pillar Rating by Morningstar analysts.
• Comgest stacks up well against its peers when looking at average manager tenure combined with transparency to management teams’ disclosure. Its portfolio managers have an average tenure of 8.7 years and teams display little turnover as a result of its collegial decision-making culture and partnership structure.
• MFS also displays stability with good manager retention (8.6 years average manager tenure) and low turnover among portfolio managers and analysts. The firm created an environment that helps retain investment talent where portfolio managers tend to be homegrown or picked from the analyst crew and stay for the duration of their careers.
Most Sustainable Fund Firms
Finally, we measured firms by the percentage of funds in their range that earn an above-average Morningstar Sustainability Rating (4 or 5 globes). As shown below, the top 10 include Comgest, MFS, and Jupiter.
• Comgest extends its record as a responsible parent to sustainability issues and boasts 52% of funds with 4 or 5 globes.
• MFS ranks among the firms with the highest percentage of medalists in their offerings, but its fund range also stands out as one with the best average portfolio Sustainability scores, which signals less ESG-related risk than most peers. While only a portion of the firm's funds have an explicit sustainability mandate, MSF focuses on high-quality franchises and sustainable earnings growth in many of its equity funds, which typically results in a bias toward companies with above-average sustainability ratings.
