Morningstar under fire from Canadian fund group

Firm's newly launched stewardship grades for Canadian fund companies overreach, lack objectivity, says IFIC

A Canadian fund industry group has attacked Morningstar over its recently launched stewardship grades for Canadian fund companies, accusing the firm of trying to create “a new regulatory standard” using staff who “lack the credentials and experience” to make serious judgment calls.
Morningstar Canada on June 16 unveiled its stewardship grades, which rate 27 fund companies, or 85% of the Canadian fund industry, on such areas as corporate culture, manager incentives, fees and regulatory history. The grades have no influence on the company’s star performance ratings.
A few days prior to that publication date, however, The Investment Funds Institute of Canada tried to block the service, said Scott Mackenzie, president and CEO of Morningstar Canada. In a June 14 letter to Don Phillips, director of research at Morningstar Inc., the IFIC accused Morningstar Canada of being biased against adviser-sold funds and “attempting to impose a new regulatory standard in place of the existing robust regulatory set of standards currently active in Canada,” among other things.
“We are very concerned with the lack of objectivity displayed, and questionable criteria and methodology utilized, and that Morningstar Canada, a commercial entity with a vested interest in the results, is attempting to insert itself as sole arbiter of what is in the best interests of investors,” Joanne De Laurentiis, president and CEO of the IFIC, wrote in the letter, which was obtained by InvestmentNews.
“We recommend that you not release this first study and utilize the results as the basis of constructive discussions with the fund managers with a view to improving the methodology and ensuring that the results that are released publicly are robust, objective and that they can stand up to scrutiny by all interested parties.”
The letter was not only sent to Mr. Phillips, Mr. Mackenzie and David O’Leary, manager of fund analysis for Morningstar Canada, but it was also widely distributed to members of the Canadian media and fund industry, Mr. Mackenzie said.
“I was very surprised to learn that,” he said.
In response, on June 28, Mr. Mackenzie fired back at the IFIC for having sent its letter to fund companies, both within and outside of the trade group’s membership, and defended its grades. The letter goes point by point to dispute each of the IFIC’s allegations about its methodology of the grades.
“Our analyst team operates autonomously from our commercial relationships, and we have no ‘vested interest’ in the results of our stewardship grades,” Mr. Mackenzie wrote in the letter, also obtained by InvestmentNews. “For instance, four of the five firms that received top marks have no commercial relationship with Morningstar, while some of our largest clients received lower grades. Needless to say, Morningstar does not receive compensation from fund companies for grading them.”
Mr. Mackenzie said he was surprised by the IFIC’s campaign against the grades, particularly after speaking to many fund companies about them.
“We have found that a lot of the fund companies were neutral about the ratings or embraced the idea,” he said in an interview with InvestmentNews.
Laurie Gillett, a spokeswoman for the IFIC, said the organization had received Morningstar’s letter but declined to comment further.