Lukas Strobl: Morningstar is, of course, the most trusted source of analysis and ratings for funds. But what about the companies that offer these funds? I'm here today with Morningstar's Thomas DeFauw. He is the coauthor of the Fund Family 100 report.
Thomas, why do parent names matter?
Thomas DeFauw: You're right, Lukas, parents matter, and that's why parent is one of the five pillars alongside people, process, price and performance on which we analysts at Morningstar evaluate and eventually rate funds at the company. So, just like you and me, more investors are returning back to the office. But of course, firms that employ them are offering far more than just the workspace. In fact, one could say that asset managers and their executives, kind of set the tone for all of the elements, all the factors that are important in our evaluation of funds. So, think about capacity management, risk management, and recruitment and retention of talent. But also, policies like incentive pay that have influence over how well the firms and their managers' interests are aligned with those of investors, they're all basically taken at the parent level.
So, when we look at parents, at asset managers, we want to identify which firms are excellent stewards of capital. We generally like asset managers that put the interests of their clients first. And those that focus on maximizing short-term profits alone will receive a negative assessment from us.
Strobl: Now, you looked at the largest 100 parents, or fund families. That is a huge data set. Did any names stand out?
DeFauw: Yeah. Well, in this report, we show several data points. And obviously, good parents, they don't score high on all of them, but maybe we can look at some of the attributes that we think are important. So, first of all, the quality of the funds on offer is obviously an important one we look at. When you look at the firms with the highest percentage of fund share classes with a Morningstar Analyst Rating of Gold, Silver or Bronze, we see that among the top 20, there are 17 that received a parent rating of above average or high from us. So, this kind of shows that there is a link between the quality of funds and the parents in our rating.
Parents with a high rating in this list are Vanguard, T. Rowe Price, Capital Group and Dimensional. But at the top of the table here is Fundsmith, which is a London-based investment boutique. They offer just three strategies, but in our opinion, they all follow a well-thought investment process. And what's also very supportive at Fundsmith is that the managers are heavily invested in the funds themselves, which means they will profit and suffer alongside their investors.
Vanguard also scores well here. And if we include the Morningstar quantitative rating, which without going into too much detail here, basically is an algorithmic version of the Analyst Rating that then allows us to look at more share classes, we can see that well over 80% of all the funds' share classes at Vanguard earn a medal. Also, of course, Vanguard is known for its reasonable fees both in the U.S. and abroad, and here in our top 100 it ranks third. Where it doesn't score well, unfortunately, is on manager tenure, and this is because the firm basically doesn't disclose any of its managers. When we look at firms that are more transparent and disclose 95% or more, we again see several positively rated parents that score high, including Artemis, MFS, Ninety One, Comgest and Neuberger Berman.
Perhaps, one last parent to point out here from this study would be Robeco. Not only do we rate the parent above average, we consider the firm to be a leader in sustainability. Robeco ranks high in the percentage of funds that earn 4 or 5 globes, meaning that their portfolios are lower in ESG risk relative to their peers, and at the same time, all their funds they offer now are labeled either Article 8 or 9.
Strobl: So, similar criteria that we already look at on an individual fund level, but it's great to know which names stand for quality by these metrics. Thank you, Thomas. Of course, this was just a highlight reel of a very insightful report. Click the link in the transcript below to get the full report.
For Morningstar, I'm Lukas Strobl.
LINK TO FULL REPORT
