A new study from Morningstar looked at more than 750 asset managers offering U.S. mutual funds and found that those with stronger fund manager tenure, retention, and personal investments in fund shares also delivered better returns for fund holders.
The study suggests that better stewards of capital have provided better investor experiences. So Morningstar looked at whether the firm-level statistics featured in the study were independently pointing to that conclusion, or were highly correlated with one another. The study found that more data is better: The data points provide independent signals and were not highly correlated. This increases Morningstar's confidence in the study's results and suggests that investors often benefit when they seek out firms with strong stewardship characteristics.
The study looked specifically at:
1) Firms' average longest manager tenure, both equally weighted and asset weighted
2) Manager retention at the firm, both for a single year, as well as over a 5-year period
3) Fund managers' investments in the funds they run, in particular the percentage of the firm's fund assets where at least one manager invests more than $1 million of his own money alongside fund holders.
To determine whether a firm's funds have performed well and delivered a good fund holder experience, Morningstar calculates two success ratios: Morningstar Success Ratio and Morningstar Risk-Adjusted Success Ratio. Both measures' denominators include all of the firm's share classes at the beginning of the measurement period. The numerator includes any share class that survived and performed in the top half of its category. The Morningstar Success Ratio considers funds' category rank based on total return, while the Risk-Adjusted Success Ratio looks at funds' category rank based on Morningstar Risk-Adjusted Return.
Checking Correlation
Correlation measures the existence of two variables together but doesn't always indicate causation.
The strongest correlations present between variables that are related, almost by definition. For example, equal-weighted manager tenure and asset-weighted manager tenure show a correlation of 0.95. There is also a strong correlation between Average Morningstar Rating (5 year) and both Morningstar Success Ratio (5 year) and Morningstar Risk-Adjusted Success Ratio (5 year).
There are a couple of other interesting strong correlations. While it stands to reason that a greater number of fund launches over the past 5 years correlates strongly with fund assets and number of fund offerings, there is also a strong correlation between a greater number of fund launches over the past 5 years and a greater number of fund liquidations and mergers over the past 5 years. This may reflect a product-manufacturing mentality by the industry overall, in which the producers (asset managers) see little risk in presenting the market with new funds, as it's fairly easy to later remove them through a liquidation or, more likely, merger. (A liquidation would require the fund to return capital to fundholders, while a merger allows it to keep those assets in-house.)
To see the correlation data in detail, click here.
To read the report in detail, click here.
