What Is a Stewardship Grade?
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 to consistently act with their shareholders' best interests in mind.
- A stewardship grade is given by Morningstar in its evaluation of mutual funds to inform investors of its governance practices and responsibility to shareholders.
- Grades range from A to F, with fund managers and corporate graded on some of the intangibles associated with making an investment decision
- Corporate stewardship ratings represent Morningstar's assessment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Understanding Stewardship Grades
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'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 by Morningstar on an absolute basis. There is no "curve."
Morningstar Stewardship Grade Criteria
Morningstar analysts' evaluation of five factors determine the grade for each fund:
- Regulatory Issues
- Board Quality
- Manager Incentives
- 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; 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.
A Note on 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.
Stewardship Grades vs. Morningstar Star Ratings
The intent and methodology for the stewardship grade for mutual funds is completely different from the 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 as measured from 1 to 5 stars. The stewardship grade is instead determined using some quantitative measures, but it is primarily based on qualitative information gathered by Morningstar fund analysts.