In a press release issued December 16, 2003, Fiduciary Analytics announced that it had “completed research on mutual fund families that ranks them by the percentage of their individual funds that pass fiduciary due-diligence screens.” Fiduciary Analytics is a Pittsburgh-based organization that provides fiduciary training and research to pension plan sponsors and investment advisers. This fiduciary scoring process developed by Fiduciary Analytics ranks funds within their peer group as “passed, acceptable, watch, or replace.” The funds are scored according to an established eight-point due diligence process which consists of the following:
- Minimum track record
- Amount of assets under management
- Stability of the organization (manager turnover)
- Holdings consistent with style
- Correlation to style or peer group
- Expense ratios/fees
- Performance relative to assumed risk
- One-Year performance relative to peer group
- Three-Year performance relative to a peer group
- Five-Year performance relative to a peer group.
Why is all of this important? The press release says it best:
Fiduciaries–such as trustees, investment advisors, and retirement plan investment committees–are required to prudently manage investment decisions. As such, when a mutual fund family is implicated in wrongdoing, the fiduciary must show evidence that a process was followed in deciding whether or not the fund family should be retained. Knowing the fund family’s overall fiduciary ranking can significantly help in reaching a sound decision, and demonstrating that a prudent process was followed.
The Street.com reports on the research tool: “Does Your Fund Meet Its Fiduciary Responsibilities?” Quote of Note: “Don Trone, founder and president of Fiduciary Analytics, said the firm conducted the extensive study due to the groundswell of investors and retirement-plan fiduciaries asking what to do with funds from families implicated in the scandal. “Not surprisingly, the funds that have been implicated didn’t rank very well,” Trone said.”
Additional quote of note: “Of Vanguard’s 100 funds, 85% were in the “passed/acceptable” camps, while 71% of T. Rowe Price’s 83 funds made the cut. . . [Vanguard founder John] Bogle always talks about meeting the fiduciary responsibilities of Vanguard’s investors, and this ranking is a vindication,” Trone said. Also turning up among the top 50 were American Funds Group (No. 31, with 62% of its funds making the top two categories) and Fidelity (No. 48, with 50% of its funds making the cut).
It is important to understand that the rankings do not factor in recent allegations, scandals, market-timing confessions, etc. in any quantifiable way. ERISA fiduciaries must still obtain information regarding the various funds in their 401(k) line-up and analyze that information as discussed in this previous post: Plan Fiduciaries: Navigating the Rough Waters of the Mutual Fund Investigations.
By the way, I would be interested in hearing from plan sponsors on what sources they find the most helpful in obtaining information regarding the mutual funds being implicated. I have mentioned some sources to use here at Benefitsblog, but would be interested in hearing about how plan sponsors are coping with this issue. Please email me by clicking here if you would like to share your experience. Any information I receive will be kept confidential. I would be glad to publish results here on a collective and purely anonymous basis.