By definition, intangibles cannot be measured, but that's exactly what Morningstar's recently launched Fiduciary Grade system is attempting. Last week, the Chicago-based fund research and ratings firm unveiled its newest offering, which assigns a letter grade to more than 600 funds assessing how well a fund company's, and its manager's, interests are aligned with those of shareholders. Morningstar plans to extend this rating to an additional 1,500 funds.
The newest rating system, which is available to premium members of Morningstar's Web site, is separate from the firm's signature Star rating system. Instead of using hard data, funds are rated on five, primarily subjective, categories: regulatory issues, board quality, manager incentives, fees and corporate culture. Each category is weighted equally and worth up to two points. The five categories, when added together, can total a maximum score of 10. A fund's combined tally is then translated into a letter grade of either A, B, C, D or F. For all categories, with the exception of regulatory issues, a fund can score no lower than a zero. Should Morningstar analysts deem a fund's advisor has seriously breached its fiduciary duty, they can give a grade as low as negative two.