Over the years, Morningstar's analysts have continued to fine-tune their reviews of individual stock and bond funds.
The formats used in the past tended to be fairly basic -- each portfolio was considered in terms of relative
performance, risk, style and turnover data. Write-ups of methodologies for constructing and running funds were
complemented with assessments of how well fund managers tracked their indexes or executed on a mandated investment
strategy.
Since helping to open a retail market for independent mutual funds portfolio research in the mid-1980s, however,
Morningstar's analysis has been incrementally sharpened to include grades of entire fund families. Nowadays, these
overarching reviews of a company's management of its investment lineup are offered alongside each report on a
particular fund's performance-related metrics.
More recently, the research shop has upgraded its analysis through so-called Parent Pillar ratings. And one of the
few fund companies to get Morningstar's top grade is Dimensional Fund Advisors. "At this point, only five firms have
met our lofty standards for a High Parent rating," noted Russel Kinnel, director of manager research for
Morningstar, in a research note.1
Besides Dimensional, or DFA as it's commonly known, the four other fund complexes getting Morningstar's top Parent
Pillar rating are: Vanguard, Dodge
& Cox, American Funds and T. Rowe Price.
Of course, Vanguard was started by a pioneer in retail index funds, John Bogle. It has over the years,
though, moved aggressively into actively managed funds. As we've written in the past, this split in business
priorities is one reason why our preferred funds provider is DFA, given its focus on serving investors through
passive strategies.
It's also worth pointing out that Morningstar was founded by Joe Mansueto, a former securities analyst at active
management firm Harris Associates. As a result, we're not surprised that other than DFA, all of the other
best-in-class winners are major players in active management.
This makes such recognition by a large independent investment research firm even more newsworthy to the investment
committee at Index Fund Advisors. In our view, there's simply little statistical evidence after studying
mathematically significant sets of market data for Vanguard or any other fund complex to resort to active management
-- other than to make higher fees off uneducated and unsophisticated investors.
"Dimensional Fund Advisors continues to be an outstanding steward of its shareholders' capital … co-CEOs David Butler
and Gerard O'Reilly oversee a strong culture focused on market efficiency and transaction cost management," writes
Morningstar analyst Daniel Sotiroff in a separate fund review.2
In addition, he highlights the fact that Dimensional's investment strategies are "rooted in research from the top
minds in financial academia." That's important, Sotiroff suggests, since DFA's researchers apply "a rigorous vetting
process when developing new strategies or modifying existing ones."
As a result, he sees the fund company's strategies as being monitored internally and new ideas "must be exploitable
in a well-diversified, low-turnover and cost-effective manner."
By virtue of such an evidence-based and objective process, Sotiroff notes that at DFA "changes to existing strategies
and the introduction of new funds are rare when they do occur."
Investors should also be aware, he writes, that retention rates for Dimensional's managers are high and the firm uses
a multi-manager approach. "This team-oriented structure," Sotiroff states, "maintains continuity and minimizes any
potential issues that could arise when managers depart."
Given such a scientific and rigorous methodology, the veteran Morningstar analyst also highlights in his reviews of
the fund company that it requires investors to access such strategies through an approved investment advisor or
platform. "Limited access acts like a barrier that protects funds from short-term trading, which can increase
trading costs and harm the interests of long-term shareholders," Sotiroff notes.
In explaining the research shop's development of its Parent Pillar ratings system, Morningstar analyst Kinnel warns
investors against considering funds used in their portfolios in isolation. He asks: "If it has the right
combination of manager, strategy and fees, is parent so important?" Kinnel then answers: "Well, yes, in the long
run, it is, and mutual funds are long-term investments."
As part of assessing a company's culture and ethical standards in managing funds with a focus on an investor's best
interests, Morningstar regularly visits with corporate decision makers and makes onsite visits, according to Kinnel.
The idea, he added, is to "understand where a firm is headed, what its values are and how much talent it has beyond
the portfolio managers' desks."
 Dave Butler
Co-Chief Executive Officer and Dimensional
Director |
|
 Gerard K. O'Reilly
Co-Chief Executive Officer, Chief
Investment Officer, and Dimensional Director |
- Morningstar, Russel Kinnel, "The Best Fund Companies and Their Ratings," Jan. 28, 2020.
- Morningstar, Daniel Sotiroff, Parent Review, Dec. 12, 2019.
This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security,
product or service. There is no guarantee investment strategies will be successful. Investing involves risks,
including possible loss of principal. Data is provided for illustrative purposes only, it does not represent
actual performance of any client portfolio or account and it should not be interpreted as an indication of such
performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk
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About the Author
Murray Coleman - Investment Writer - Index Fund Advisors
Murray is an investment writer at Index Fund Advisors. Prior to joining IFA, he worked as a funds reporter for The Wall Street Journal, The Financial Times, Barron's and MarketWatch.