Governance Matter: Morningstar Stewardship Grades and Mutual Fund Performance

• Main Authors: CAO, Jerry X., GHOSH, Aurobindo, GOH, Jeremy, NG, Wee Seng
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Mutual fund performance; Corporate Governance; Stewardship Grades; Star Rating; mutual fund ratings; predictive; principal component; Granger Causality; Corporate Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/soe_research/1609; https://ink.library.smu.edu.sg/context/soe_research/article/2608/viewcontent/gradesmatter_011114a.pdf
• Institution: Singapore Management University

Mutual fund investors have the arduous task of disentangling luck from ability of mutual fund managers’ performance. In this paper we investigate the role of mutual fund corporate governance (measured by Morningstar Stewardship grade) in mutual fund performance. We propose an objective data-driven corporate governance score based on principal components of Morningstar Stewardship Grades. Furthermore, we establish corporate governance scores have Granger Causality on long-term risk-adjusted returns. The findings suggest that corporate governance grades of mutual funds carry information content beyond the usual star rating measures for predicting long-term mutual fund performance and provide an effective tool for selecting funds.