Morningstar's Mysterious Process

Morningstar is much in the news these days with the naming of their "Manager of the Year" awards. How to do they pick these folks, you might ask? If my recent look at their "international" manager finalists is typical of their overall approach, then I think it's safe to say that Morningstar marches to a different drummer than the rest of us.

Recently I came across an article on their three finalists for international manager of the year. (Naturally, if they named funds on our Recommended List, I'd be here bragging about it.) But none of the funds on our list made the cut, which made me think, "Wow! Our funds have done pretty good and they didn't make it, so the performance of their three finalists must be really something."

Well... no. For 2005, their three finalists averaged gains of 20.5%. Our four current foreign funds averaged 32.5%. The two we added in recent months, as you might expect, have great records this year. That's how they climbed to the top of our rankings. But even the other two, both of which we held all year, averaged 26.8%. So, what makes the Morningstar finalists so special?

A Morningstar spokesperson says: "While we certainly seek to recognize managers who've had an outstanding year, we're also looking for those who've built solid long-term results. Simply put, one year of shooting out the lights won't cut it. We also consider the stewardship of the fund and favor managers who have tried to do right by their shareholders."

Aaah... so one good year isn't enough. Ok, how about three? The three Morningstar finalists averaged 24.9% for the three-years ending December 31; our funds averaged 35.9%. Hmmm. Maybe they're looking at five-year records. Given that the past five years included some difficult times, it makes for more of a test. Let's see... theirs averaged 7.0%, ours averaged 9.8%.

If they're looking at periods longer than five years, I don't want to know. It would be too discouraging to think they factor in something as irrelevant as a fund's 10-year track record. Besides, it's not called the "Manager of the Past Decade" award. So, obviously performance is only one part of Morningstar's process. There's that "stewardship" element they mentioned, and an emphasis on "doing right by their shareholders." Personally, I'm not sure what could be better stewardship or more "right" for shareholders than turning in great performance numbers.

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