Culture Matters: Putting Fundholders First Drives Success

If you’re looking to increase your odds of investing success, stick with fund companies that offer inexpensive funds run by stable investment teams that invest alongside fundholders.

Those are some of the takeaways of Morningstar’s first global Parent Rating Report, which looked at key traits of the more than 300 fund families that Morningstar analysts cover and more than 6,000 firms in Morningstar’s database.

Get the full report: The Morningstar Parent Rating Report

The Tone From the Top

Morningstar assigns Parent ratings to all the asset management companies it covers and collects data on. Parent is one of the three pillars of the Morningstar Medalist Rating. Like the other two pillars, People and Process, the Parent rating ranges across five points: High, Above Average, Average, Below Average, and Low. Morningstar’s assessment of an asset manager’s investment culture and commercial practices determines where it falls on that scale.

A firm’s investment culture includes its ability to attract, develop, and retain talent. The best firms nurture talented portfolio managers and analysts and plan transitions well in advance. Good parents pay their investment professionals in ways that align their interests with fundholders—they compensate managers for delivering returns, not gathering assets—and encourage managers to invest their own money in the strategies they run. Top firms also have appropriate risk-management personnel and tools.

Commercial practices include the less flashy elements of running an asset-management business, such as product development, capacity management, distribution, fees, and day-to-day operations. These elements are easy to overlook but critical to investors’ experiences. Good parents keep a close eye on fees, don’t launch new strategies unless they have enduring investment merit, and ensure all areas of the firm are well-staffed.

Senior leadership sets the tone from the top by presenting a clear vision for the firm. This includes daily operations, strategic overhauls, mergers and acquisitions, and brand management. One size does not fit all. A boutique with few employees can be as well-run as an acquisitive global leviathan with thousands of personnel. The key is not letting operational issues or poor management impede investors from achieving their investment goals.

Stable, Cheap, and Highly Rated

Half of the firms Morningstar analysts cover earn Average Parent ratings. These firms tend to be industry standard. The overall quality of these firms’ offerings can be inconsistent or lack a strong competitive edge, but includes strategies with higher Medalist Ratings.

Morningstar tends to cover firms and strategies with best-in-class approaches in their respective wheelhouses, so our Parent ratings do not fall on a normal distribution; there are many more Above Averages ratings than Below Averages.

Firms that earn higher Parent ratings tend to share positive attributes. They create stable, inexpensive fund lineups that garner higher Medalist Ratings and Morningstar Ratings (commonly known as star ratings); they also have more experienced portfolio managers and higher rates of manager retention.

A Good Guide to Future Success

In general, Morningstar’s Parent ratings do a good job of pointing to future success, especially over longer periods. The exhibit below shows the relationship between qualitatively assigned Parent ratings and their subsequent average Morningstar success ratios. The success ratio measures the percentage of a firm’s funds that have both survived and beaten the median peer in their respective categories on a risk-adjusted basis (as measured by Morningstar Risk-Adjusted Return). We grouped firms according to their Parent ratings as of December 2021, 2019, and 2014, then compared their average success ratios over the subsequent three-, five-, and 10-year periods.

In December 2014, more than 20 firms earned High Parent ratings. Over the following 10 years through December 2024, more than half of those firms’ funds in 2014 survived and beat peers, on average. Less than 30% of the lineups of the roughly 150 firms with Average Parent ratings in 2014 met the same definition of success on average over the same period.

Retention Equals Stability

Retention signals stability, and those firms that demonstrate the ability to keep managers around for the long haul typically generate stronger performance. The exhibit below shows the relationship between five-year manager retention rates and subsequent average success ratios. The retention rate is lowered by any portfolio manager who retires, leaves the firm, or moves to another, non-portfolio manager role at the firm.

The effects of strong retention appear to compound over time, and its relationship to long-term success is positive, suggesting continuity benefits investors.

Eating Their Own Cooking

When portfolio managers own the funds they run, they show conviction in the strategies and align their interests with fundholders. They also demonstrate confidence that the firm will support the strategies with appropriate resources over time. Manager co-investment counts, and there is a positive relationship between those firms with strong manager ownership and higher subsequent absolute and risk-adjusted success ratios.

Over all periods studied, firms with strong co-investment across 100% of their assets had higher subsequent success ratios than those with slim-to-no ownership. Firms with low levels of manager ownership lagged peers over the trailing five- and 10-year periods ended December 2024.

Low Fees’ Enduring Advantage

That low fund expenses lead to peer-beating returns is well-known. Over each of the periods measured, firms that charged the lowest fees achieved the strongest absolute and risk-adjusted success ratios on average. Over the 10-year period ended December 2024, the most affordable firms posted a risk-adjusted success ratio of 50% on average, while the most expensive firms’ risk-adjusted success ratio was just 24% on average.

The above exhibit groups firms according to their Average Global Combined Fee Levels. This calculation begins by percentile-ranking each share class’ expense ratio, or, where expense ratios are unavailable, Representative Cost ex-Transaction Fee within its relevant category peer group. These individual share class fee levels are then averaged to determine an Average Global Combined Fee Level for the firm.

Lineup Turnover is Disruptive

As investor preferences and the asset management industry evolve, so too do asset managers’ fund offerings. The number of funds and ETFs globally has increased substantially over time, but not all funds make it. Some struggle to perform, and others never grow large enough to be economically viable. Although some lineup turnover can be healthy, high levels of product proliferation and rationalization can be disruptive.

The following exhibit aims to measure whether high levels of lineup turnover persist and drag on subsequent average success ratios. Firms are first grouped according to their 10-year lineup turnover rates as of December 2021, 2019, and 2014, before being compared based on their average success ratios over subsequent three-, five-, and 10-year periods.

When firms merge funds to lower fees or shut down the poorest performers, the effect should promote success, but the results don’t necessarily show this. Rather, the firms that experienced high historical levels of lineup turnover continued to struggle in the following years. Asset managers that made no lineup changes posted the strongest performance in subsequent years.

Stars Bode Well for Success

The Morningstar Rating for funds is a quantitative, backward-looking measure of a fund’s past risk-adjusted performance relative to its category peers. The following exhibit examines the relationship between a firm’s average Morningstar Rating and its subsequent success ratio. The relationship is impressive: Of all the measures evaluated in this paper, a firm’s average Morningstar Rating has the strongest relationship to its future average success ratio.

Past studies have shown that the Morningstar Rating bears a strong positive relationship to future performance at the fund level, but this is one of the first papers to examine the relationship at the asset manager level. Caveats include the fact that these results exclude funds that have been merged or liquidated; firms tend to obsolete their worst performers. Nonetheless, the relationship’s strength suggests that firms that provide solid risk-adjusted performance continue to outperform.

For more insights into Morningstar’s Parent ratings and the characteristics that correlate with success, download the full report here.