DEFINITION of 'Stewardship Grade'

Stewardship grade is an evaluative data point in Morningstar's fund and stock reports. Stewardship grade assesses the quality of a company's governance practices. Stewardship grades for both funds and stocks range from A (excellent) to F (very poor) based on criteria that measures the effectiveness of fund and corporate managers to consistently act with their shareholders' best interests in mind.

BREAKING DOWN 'Stewardship Grade'

Morningstar initiated its stewardship grades for both the funds and stocks covered by its investment research services in 2004 in response to the mutual fund and corporate scandals at that time. Morningstar sees a high level of managerial stewardship as an important investment quality for investors to seek out in their selection of funds and stocks.

Morningstar Stewardship Grade Criteria

Morningstar's stewardship grade for funds goes beyond the usual analysis of strategy, risk and return. The stewardship grade allows investors and advisers to assess funds based on factors that they 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.

Funds are graded on an absolute basis. There is no "curve."

Morningstar analysts' evaluation of five factors determine the grade for each fund:

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.

For stocks, three broad areas are examined: transparency in financial reporting, shareholder friendliness, and incentives, ownership and overall stewardship.

The stewardship grade tries to capture some of the intangibles associated with making an investment decision. While the grades are not intended to serve as buy/sell signals in isolation, when combined with other Morningstar analyst commentary—such as an assessment of a fund’s strategy and management—they can help determine the difference between a good investment and one to avoid. The grades are primarily based on information compiled from public filings and the expertise of Morningstar’s fund analysts.

Corporate Governance

Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

Bad corporate governance can cast doubt on a company's reliability, integrity or obligation to shareholders — which can have implications on the firm's financial health.

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