Is Your Fund a Good Steward?

10/10/2007 12:00 am EST

Focus: FUNDS

Christine Benz

Director of Personal Finance, Morningstar, Inc.

We snagged an interview with Christine Benz, director of fund analysis, at Morningstar, who gave us an insider's look at her company's stewardshiprating of mutual funds.

Christine advised investors that, when choosing a mutual fund, they needed to go beyond simply analyzing a fund's returns and its expenses, in determining if it is the right fund for them.

Her company has done this, by developing its stewardship rating, which encompasses how well a firm has taken care of its investors' capital. They ask the question: "Does the fund treat its shareholders as owners or just consumers of a product?" That often comes down to observing if the fund acts like salesmen, hawking products, launching trendy, ripped-from-the-headlines funds, or do if they actually have a sober, steady strategy.

Included in the stewardship rating is an analysis of the fund's expenses, which Morningstar strongly emphasizes, as it considers cost to be one of the most important predictors of fund performance.

As well, their rating includes a test of the fund's independence-not just noting the number of independent directors, but also judging whether those directors are actively protecting the interests of the fund's shareholders and not just rubber-stamping management's desires.
Additionally, the rating reviews regulatory infractions and involvement in scandals, such as the recent market-timing brouhaha.

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