Think corporate culture and governance has anything to do with a mutual funds’ performance?
According to a pair of academics from the Lubin School of Business at Pace University, corporate culture has very little bearing on a fund’s returns. According to Morningstar, the fund research firm, stewardship of a fund on "key intangibles" matters.
Based on a comparison of various funds’ corporate culture ratings to their overall performance from 2005 to 2010, the pair found that: “…there is little significant evidence that corporate culture predicts better fund performance,” Aron Gottesman and Matthew Morey wrote, in a study of Morningstar’s corporate culture ratings for mutual funds.
Morningstar’s ratings were established in 2004 in the wake of late-trading and market-timing scandals in 2003.
"This is somewhat surprising since we do find that funds with better corporate cultures have lower expense and turnover ratios, which are usually related to better performance," the pair added.
They also reasoned that strong corporate cultures with the added benefits of transparency and low turnover rates, "may be cancelled out by the fact that these strong- culture funds may be inflexible."
There may be flaws in the Gottesman-Morey study.
Alexa Auerbach, a Morningstar spokesperson, told Money Management Executive that: "First, we’re skeptical of any study that finds that fund expenses have no predictive value. Expenses have been shown time and again to be predictive of performance. We think it’s also important to point out that Gottesman and Morey did find that a high Culture Score was strongly associated with low fees, long manager tenure, low turnover, and fund survival. These are all very positive qualities in a mutual fund."
She added that the study only examined domestic equity funds, which represents about half of Morningstar’s Stewardship Grade coverage, over a single five-year time period and that the pair's method for addressing survivorship bias actually inflates the performance of funds with poor Culture grades.
According to Morningstar: "The Stewardship Grade serves as a handy way to assess key intangibles--such as the quality of a fund's board of directors or a fund firm's corporate culture--that can make the difference between a great investment and one to avoid."
Auerbach said the study's primary measures of “success” is the Sharpe ratio of excess return in an asset, which does not take a fund’s category into account and as a result will "muddle the results."
In conclusion, Auerbach said the research firm conducted its own study last year that found that culture grades are predictive of fund performance.
"We examined how funds have performed since Morningstar first issued its Stewardship Grades in 2004 and again after we revised our Stewardship methodology in 2007. We concluded that funds with high Stewardship Grades (those receiving grades of “A” or “B”) are very likely to survive in the long-term, and more likely to provide competitive risk-adjusted returns in the ensuing period."