Stewardship Grade

What Is Stewardship Grade?

A stewardship grade is an assessment of the quality of a company's governance practices, used in mutual fund and stock reports issued by Morningstar, the investment research firm. 

Stewardship grades for both funds and stocks range from A (excellent) to F (very poor) based on criteria that measure the effectiveness of fund and corporate managers in consistently acting with their shareholders' best interests in mind.

Understanding Stewardship Grades

Morningstar initiated its stewardship grades for both the funds and stocks covered by its investment research services in 2004 after the reputations of a number of mutual fund companies were tarnished by government regulatory investigations into their practices.

Morningstar sees a high level of managerial stewardship as an important investment quality for investors to weigh in their selection of funds and stocks. Its stewardship grade for funds goes beyond the usual analysis of strategy, risk, and return. It 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 any potentially conflicting interests of the management company.

Morningstar Stewardship Grade Criteria

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

1. Regulatory issues
2. Board quality
3. Manager incentives
4. Fees
5. Corporate culture

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, incentives, and ownership
• Overall stewardship

The stewardship grade attempts to capture some of the intangibles associated with making an investment decision. While the grades are not intended to serve as buy or sell signals in isolation, when combined with other Morningstar analyst commentaries—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.

About Corporate Governance

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

Bad corporate governance can cast doubt on a company's reliability, integrity, or ability to meet its obligation to shareholders. And that can have implications for the firm's future.

Stewardship Grades vs. Morningstar Star Ratings

The intent and methodology for the stewardship grade for mutual funds are completely different from Morningstar's star ratings for funds, and the stewardship grade has no impact on a fund’s star rating.

The Morningstar star rating is a quantitative assessment of a fund’s past performance in terms of risk and return and is graded between 1 and 5 stars. The stewardship grade is determined using some quantitative measures, but it is primarily based on qualitative information gathered by Morningstar fund analysts.