Morningstar to Vanguard: Gold medals and ’A’ for stewardship

OREANDA-NEWS. September 02, 2015.Continuing our strong grades from the investment analysis firm Morningstar, Inc., Vanguard has received an "A" for overall stewardship as well as medals for many of the funds analyzed, including another "Gold" medal for the Vanguard Target Retirement series.

Investors and investment industry observers rely on Morningstar for its independent investment research and manager and fund analyses. The firm covers 71 Vanguard funds (including Vanguard Target Retirement Funds, which Morningstar assesses as one fund) and recently reported that most of them have been named Morningstar Analyst Ratings medalists, with 29 designated as "Gold," 25 as "Silver," 11 as "Bronze," and 6 as "Neutral."¹ In addition to the Target Retirement Fund series, Gold funds include index, actively managed, subadvised equity, sector, and in-house managed funds. (A complete list of the Gold funds appears at the end of this article.) None of the Vanguard funds analyzed by Morningstar received a negative rating.

"We're both humbled and gratified by Morningstar's findings," said Sean Hagerty, principal and head of Vanguard Portfolio Review Department, which is responsible for overseeing Vanguard's fund offerings and evaluating and developing new funds. "Our ultimate goal is to ensure that each of our funds individually—and all of them collectively—continue to help clients achieve investment success," Mr. Hagerty said. "While we appreciate that Morningstar has validated this work, we also know we can't relax. Our focus has been and always will be on our investors."

A good report card, braced by a strong culture

Vanguard's strong showing reflects the "A" grade given by Morningstar in its Vanguard Stewardship report, which summed up Vanguard in one word—dominant. These reports review and score a fund firm's corporate culture, fund board quality, fund manager incentives, fees, and regulatory history. The Morningstar report identified Vanguard's corporate culture as among the strongest in the industry: "As it's grown, it [Vanguard] hasn't lost its true north, and evidence of its mission to help investors succeed is apparent."

Morningstar cited several examples of this culture, including its ownership structure, noting that the firm "doesn't have outside owners to pay dividends to or share profits with . . . so it returns its profits to its fundholders through lower expense ratios on its funds. . . In Vanguard's case, its fundholders are its shareholders, and vice versa, and those shareholders are 'paid' only through the funds."

The firm's scorecard also showed a grade of "A" for the quality of its fund board, and "Neutral" for regulatory history, which Morningstar said is the highest rating a firm can get in this category, given that "investors should expect fund companies to comply with laws and regulations" and Vanguard's “clean regulatory record."

Funds among the lowest costs versus peers

Vanguard also received an "A" for fees, with Morningstar observing that Vanguard's unique ownership structure helps to keep expenses to a bare minimum. "Our commitment to keeping costs low and returning value to investors is constant, and can be especially important to retirement plan fiduciaries, who need to assess the reasonableness of investment costs," said Martha King, managing director, Vanguard Institutional Investor Group. "It's one reason we continually seek efficiencies as we look to return even more value to plan sponsors and participants."

Ms. King noted that the Morningstar report also suggested that as Vanguard grows larger, it must work hard to maintain its client-first mindset, commitment to low costs, and focus on doing the right thing for investors. "We're aware of the challenges that can emerge from growth. Yet, since Vanguard's launching 40 years ago, our core purpose has never changed: To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success. Our focus remains on helping our investors build for their futures."

¹Morningstar, Morningstar Stewardship Grade for Fund Firms, Vanguard, June 25, 2015.

Notes:

• All investing is subject to risk, including the possible loss of the money you invest.
• Vanguard is client owned. As a client-owner, you own the funds that own Vanguard.
• Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments (stocks) to more conservative ones (bonds and short-term reserves) based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
• The Morningstar Analyst Rating for Target-Date Series mutual funds is not a credit or risk rating. In February 2013, February 2014, and April 2015, Vanguard Target Retirement Funds received a Gold rating for 2012, 2013, and 2014, respectively. The Morningstar Analyst Rating for Target-Date Series mutual funds reflects a subjective evaluation of quantitative and qualitative factors performed by mutual fund analysts of Morningstar Inc. and represents a summary expression of forward-looking analysis of target-date mutual funds. The Morningstar Analyst Rating is assigned on a five-tier scale running from Gold, Silver, Bronze, Neutral and Negative. Funds are evaluated on five key pillars: process, price, performance, people, and parent. A Gold rating means that the series has distinguished itself across all five pillars. It expresses an expectation that the funds, in a series as a whole, collectively will outperform their relevant performance benchmarks and/or peer groups within the context of the level of risk taken over the long term. The Silver rating applies to funds with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction. A Bronze rating applies to funds with advantages that outweigh the disadvantages across the five pillars and with sufficient level of analyst conviction to warrant a positive rating. A Neutral rating is for funds that aren't likely to deliver standout returns but also aren't likely to significantly underperform, according to the analysts, and a Negative rating is reserved for funds that have at least one flaw likely to significantly hamper future performance and that are considered by analysts an inferior offering to their peers.
• The Morningstar Analyst Rating for Target-Date Series mutual funds should not be used as the sole basis in evaluating a target-date mutual fund series. This Morningstar Analyst Rating is based on Morningstar's current expectations about future events; therefore, in no way should the rating be considered as a guarantee of favorable performance. All Morningstar Analyst Ratings involve unknown risks and uncertainties, which may cause Morningstar's expectations not to occur or to differ significantly from what was expected.
• The Morningstar Analyst Rating for the Target-Date Series is distinct from the Analyst Rating for individual mutual funds and mutual fund families. A fund in a target-date series may have analyst ratings for both its series and a particular fund, and in some cases those ratings may not be identical. While target-date series funds are typically evaluated by Morningstar once a year, there is no set time-frame for their evaluation. For additional information about the Morningstar Analyst Rating for Target-Date Series mutual funds, including its methodology, visit corporate.morningstar.com.
• Morningstar Analyst Ratings are available via a membership subscription to Morningstar Premium, available at Morningstar.com.