(PUB) Investing 2015

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Why Manager Retention Matters Morningstar Research | Bridget B. Hughes

firms. In 2014 and in 2015 , we studied those data points to determine whether firms that exhibited stronger stewardship metrics also produced better results. To gauge a firm’s success, we calculated its success rate and risk-adjusted success rate. The success rate tells what percentage of a company’s mutual funds both survived and outperformed its respective category median funds over certain time periods. Overall, we found in both studies that better steward- ship measures corresponded with better results, particularly over the longer term and often more so on a risk-adjusted basis. Here, I’ll share the portion of the 2015 study that considered manager retention. Manager-retention rates show investors how well asset-management firms keep their mutual fund portfolio managers. The rates measure what percentage of a firm’s portfolio managers remained with a firm as a portfolio manager, even if their management assignments changed among a firm’s funds. Morningstar calculates this figure for firms annually and also determines a five-year average. A lower number suggests more churn in the fund- manager ranks, though some managers who have been removed from a firm’s mutual funds may still work at the company in another capacity, such as a senior management role or a manager of non-mutual- fund strategies. Manager-retention rates provide insight into a firm’s corporate culture. Strong corporate cultures are able to both attract and nurture investment talent and to foster an environment that’s supportive of portfolio- management careers at the firm. We consider this retention figure alongside our knowledge about invest- ment professionals’ careers at each company to help make a qualitative assessment of a fund firm’s corporate culture. Our 2015 study found that about a third of fund companies have had no manager turnover during the past five years. Overall, most firms are stable, with High Manager-Retention Rates Signal Firm Stability Overall

Better Stewards Have Better Results

Firm Asset- Weighted Manager Tenure,Years

Firm Risk- Adjusted Success Rate, 10 Year

Steward- ship Grade

Firm Manager- Retention Rate, 5 Year%

Firm Avg Manager Tenure,Years

Firm Success Rate, 10 Year

Name

Dodge & Cox

96.7

21.1

25.8

100

50

Z Z Z Z Z X X X X X C C C C C C C C C C

American Funds

95.5

11.8

21.1

62

67

T. Rowe Price

94.4

7.7

11.3

81

79

Vanguard

92.8

7.6

12.0

77

78

DFA

91.6

7.9

9.4

77

61

Franklin Templeton

95.8

14.1

15.5

37

36

JPMorgan

95.1

7.3

11.3

43

40

MFS

94.4

10.0

11.5

41

43

Fidelity

92.1

5.5

9.2

46

33

Lord Abbett

90.2

7.3

9.7

41

39

Janus

93.1

5.7

6.8

34

36

Wells Fargo

92.7

9.2

10.2

31

28

American Century

92.7

8.1

11.2

37

36

Oppenheimer

90.7

7.1

9.6

28

29

John Hancock

90.6

6.2

8.0

19

15

PIMCO

90.1

3.3

4.7

63

52

BlackRock

88.1

5.3

11.6

30

28

Columbia

86.8

7.2

9.3

18

17

Invesco

84.2

6.7

11.3

25

27

Principal

80.3

5.2

7.6

31

33

Industry Average

93.68

6.9

8.1

33

33

Data as of May 31, 2015.

One of the key pieces to Morningstar’s Parent Pillar ratings and Stewardship Grades is a firm’s Corporate Culture. We favor asset-management companies that show evidence of putting their fundholders’ inter- ests ahead of their own and that can build invest- ment departments more likely to produce good long- term results for generations to come. Although our Corporate Culture assessments depend largely on qualitative judgments, in 2011 we devel- oped several firmwide data points to help our analysts inform and support their evaluations of investment