Corporate Governance and Mutual Fund Performance : A First Look at the Morningstar Stewardship Grades

This paper documents for the first time the relationship between mutual fund governance and mutual fund performance. Using the first release of the Morningstar Stewardship Grades on August 24, 2004, we find that funds receiving good grades outperformed funds with bad grades by 19 to 23 basis points per month over 1/2001-7/2004 and by 10 to 16 basis points per month over 9/2004-12/2006. In an examination of daily fund flows subsequent to the announcement date, we see evidence that investors sold funds with poor grades and bought funds with good grades. Of the five variables Morningstar uses to compute their grades, the Board Quality and Fees variables shows the most explanatory power. These results broadly support the main conclusion of Gompers, Ishii and Metrick (2003 QJE), namely that corporate governance significantly affects performance