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Morningstar Lists the Marks of Passive Fund Sponsors that Back Investors’ Interests

A recent Morningstar report analyzed the stewardship practices of large sponsors of passively managed funds to assess the degree to which the firms have aligned their own economic interests with those of their funds’ shareholders. Morningstar found that firms that with good stewardship practices have delivered above-average category-relative performance. The report suggested key indicators for investors to assess firms on their alignment with shareholders’ interests, including:

  • Low expense ratios: Morningstar noted that expense ratios among most fund sponsors have fallen on both an equal- and asset-weighted basis over the past decade, with Fidelity and Vanguard showing the lowest fees. State Street was the only surveyed firm whose average fees have not declined during the past 10 years. Schwab and TIAA/Nuveen have seen the sharpest reduction in average fees, Morningstar found.
  • Sharing a greater portion of generated securities-lending revenue: The amount of securities-lending revenue passed back to the fund, and ultimately fund shareholders, is a less transparent, but meaningful, way companies can benefit their fund-holders.
  • Thoughtful product development: Frequent fund launches and liquidations may indicate that a firm’s approach to product development is more sales-oriented than investment-oriented, according to the report.
  • Investing in portfolio management infrastructure: Passive investment shops demonstrate good stewardship by investing in their portfolio management teams and infrastructure to improve index-tracking efficacy. Passive fund sponsors that balance fee cuts with their ability to efficiently track indexes do best by investors.