Morningstar believes fund companies that align their interests with those of fundholders are more likely to serve fundholders well than those that do not. We rate the investor-friendliness of more than two dozen firms using our Stewardship Grade methodology, which assesses firms' culture, compensation and co-investment practices, fees and regulatory history. The highest-rated firms put stewardship ahead of salesmanship, align their financial interests with those of fundholders and offer investors a good value proposition.
We recognize industry-leading stewardship practices with the Morningstar Steward of the Year Award, which debuted this year. To be eligible, a fund company must have a history of fundholder-friendly behaviour: We only consider those with an A or B Stewardship Grade or a Positive Parent rating. We then winnowed the field by focusing on firms that have distinguished themselves on the stewardship front over the past year. The finalists and the winner are listed below.
Finalist: Invesco Canada
Invesco has improved the investor experience by opening up much less costly avenues for do-it-yourself investors and advisors alike. It was among the first non-bank firms to open a lower-cost D series for investors without advisors--an effort that pushed other fund companies to follow suit. Self-directed investors now have more ways than ever to put their money to work without having to pay for advice they're not getting. (A few independent firms, including Mawer, Steadyhand, Beutel Goodman and Leith Wheeler catered to DIYers before Invesco, though often with high minimum investments and limited access through brokerage platforms.)
More recently, Invesco launched a suite of proprietary platform-traded funds (PTFs) geared to the fee-based advisor channel. Like an ETF, they transact on equity trading platforms but, like mutual funds, are priced at the end of the day--a process that avoids potentially costly bid-ask spreads. The biggest attraction of PTFs is that they cut out intermediary Fundserv, which executes and settles trades from brokers and dealers. The move cuts costs by surprisingly large amounts. For most of the PTFs, we estimate the management fee is 30 to 35 basis points (bps) lower than the same fund in comparable fee-only series. The only negative, at least for now, is that Invesco only offers the PTF structure for a small portion of its lineup.
In addition to investor-friendly innovations in distribution, Invesco Canada deserves credit for a solid investment culture. While relatively high personnel turnover at its Trimark subsidiary keeps it from the ranks of the industry elite, Invesco has lured capable investors as replacements, who have maintained Trimark's contrarian investment style. Lastly, Invesco continues to be proactive in capping funds before they become too large.
Finalist: Mawer Investment Management
Mawer's stewardship practices continue to place it at the top of the industry heap. The firm attracts and retains top-rate investment professionals. It applies its well-defined investment process consistently, which has led to superb long-term results. The firm doesn't rest on its laurels, however. A culture of continuous self-improvement led it to strengthen its risk-management capabilities in recent years--one of the reasons why we named Mawer Fund Company of the Year in 2014.
Mawer continued its fundholder-friendly ways in 2015. It cut off institutional investors' access to Mawer Global Small Cap to preserve manager Paul Moroz's ability to invest in small caps with ease. Mawer had already closed Mawer Canadian Equity to new institutional investments and closed Mawer New Canada to all investors. It's usually not good business to turn away assets, at least in the short term, and fund companies willing to do so show they put the fundholders' best interests ahead of their own.
Mawer also deserves credit for the quality of its communication with fundholders. The firm's informative and sometimes quirky blog, which belies its "Be Boring" motto, provides a window into the investment team's thinking, and its annual investor letter is a must-read.
Winner: EdgePoint Wealth Management
Launched in the worst days of the 2008 financial crisis, our winner is the youngest of the three finalists. But the firm's veteran leadership worked together closely at Invesco Trimark, where they enjoyed long-term investment success before striking out on their own. EdgePoint's late 2008 birth gave it the opportunity to build its portfolios at severely depressed stock prices, fuelling outstanding results in the ensuing years. That the company has yet to cope with an extended downturn could be a cause for concern, but the team's ability to navigate past market cycles well gives us confidence.
Right from the get-go, EdgePoint coded fundholder friendliness in its DNA. It deliberately kept its fund lineup small and eschewed pricey marketing campaigns to keep costs low, leading to some of the most competitively-priced offerings available through the advisor channel. In a rarity for the industry, the firm also set conservative asset targets at which funds across its lineup would close to new investments, assuring fundholders that management would have the flexibility to execute its strategy far into the future. Such foresight now limits the risk that the funds will become too bloated to match their past success.
EdgePoint takes care to partner with advisors who share the firm's long-term ethos and buy into its investment philosophy. Because short-term trading can raise transaction costs and force management to sell shares at inopportune times, EdgePoint's discriminating approach benefits all long-term fundholders. The firm also uses clear and regular communication to guide advisor and investor expectations. After big gains in 2009, management wrote to clients to explain that such returns were unlikely to repeat themselves. And when stocks swooned in August 2015, it told clients the turmoil had given it an opportunity to put cash to work at bargain prices. Such communication combats investors' tendency to buy and sell at the wrong times, improving their long-term experience.
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