Morningstar’s Laura Lutton is probably the most influential woman in manager research.
However, that statement is not without its problems. It damns her with faint praise because, just as in the wider asset management industry, there simply aren’t that many women in manager research.
The fact of the matter is that Lutton – director of manager research practice for North America at Morningstar – is one of the most influential people in manager research, period.
The underrepresentation of women in asset management is hardly her fault, but it is something she knows all too well, and she has taken steps to highlight the problem.
In 2015 she co-authored a paper called Fund Managers by Gender, which found that less than 10% of portfolio managers in the US were women.
This compares unfavorably with other professions - women account for more than a third of lawyers and make up 33% of doctors. Further research published by Lutton also found US asset management lags other countries in this regard.
‘The study quantified what I had observed anecdotally about the industry…. where one in 10 fund managers is a woman in the US,’ she says. ‘I had observed that going to visit all these firms all these years, where sometimes I would be the only woman, or one of two, that we would meet with.’
A DIFFERENT KIND OF DIVERSIFICATION
The problem is not just cultural – it has an impact on investor returns too.
‘That 2015 study suggested that diversity is a good thing in terms of performance, in that mixed-gender teams had a slightly better category rank in recent years than single-gender teams,’ she says. ‘That intuitively makes sense. If you are trying to beat a benchmark, especially one that is hard to beat, you want a range of ideas around the table that help you perform better.
‘Increasingly we are seeing asset managers embrace the idea that they will be more competitive if they have a wider range of backgrounds making their investment decisions. I think that’s a healthy advancement for the asset management industry.’
Surely just recognizing this is a step toward a better balance? Lutton wants to believe it is, but the numbers prove otherwise.
‘The optimist in me would like to say yes, but she is overshadowed by the pessimist who looked at the data in our study and found that there had actually been a decline in the percentage of women fund managers since the financial crisis,’ she says. ‘So that is not very optimistic data.’
Still, it’s not all doom and gloom.
‘What’s fantastic about the asset management industry is that it’s a meritocracy,’ she says. ‘If you put up good numbers, if you are good at identifying good investment ideas, you are going to do really well and that is regardless of gender. So in that sense it is a very measurable industry and that can level the playing field, and it can provide great opportunities for women if they choose to make their career here.’
MOVING ON UP
Lutton is proof of this theory. She has been working for Morningstar for 17 years – first as a stock analyst and then in manager research for the past 15 years.
Today she oversees 54 people as head of manager research practice for the company’s biggest market.
Her team assigns the firm’s Analyst ratings to 1,652 mutual funds, accounting for around 6% of all those available for sale in the US, with a combined total of $11.2 trillion in assets under management – or 68% of the market.
A fund’s Analyst rating can be seen by any of the 1.9 million unique monthly users of the Morningstar website. The Analyst reports can be read by the 118,200 Morningstar Premium subscribers and the 13,450 Morningstar Direct license holders.
And demand for her team’s work has been on the rise over the past couple of years, particularly from broker-dealers and wealth shops looking to increase their coverage in anticipation of the now-delayed Department of Labor (DOL) fiduciary rule.
Morningstar has around 20 such clients for whom it acts as a consultant, providing access to its tools, database, research reports and Lutton’s team of analysts to help them choose and monitor investments. It has doubled the number of these clients this year.
‘It’s a business we started a few years ago, but it has been growing in size in terms of the number of clients, so the analysts are busy,’ Lutton says.
‘We added quite a few at the beginning of this year, as a lot of firms were making their plans about how they are going to comply with the DOL [rule] and we have been subtly adding throughout 2017.’
The highest profile of these relationships, with Merrill Lynch, was announced in 2016. The deal means that funds on the wirehouse’s platform must be either covered by Merrill’s CIO home office due diligence team, led by former Citywire cover star Anna Snider, or rated by Morningstar’s analyst team, led by Lutton.
Snider’s team covers around 700 funds, leaving around 1,100 to be covered by Lutton’s.
‘What has been nice about this relationship is that we are analyzing funds just as we normally do,’ Lutton says. ‘They go through the same process as any other fund on our coverage list. We publish that research to our software and it is available to all of our clients. Merrill then picks this up and makes it available to all their financial advisors.
‘We are not involved in deciding what’s on or what’s off [the platform]. They are making all those decisions, but we are researching the individual funds and helping in that regard.’
Still, while demand for the Analyst ratings has been soaring, they have also come in for criticism, specifically in an article in The Wall Street Journal last month. The focus of the article was largely Morningstar’s Star ratings, which the paper said were not indicators of future outperformance – something it claimed many investors misunderstood, occasionally to their detriment.
The article also looked at the firm’s Analyst ratings, suggesting that the performances of funds ranked gold, silver and bronze were not dramatically different and questioning whether asset managers could influence ratings.
Morningstar issued detailed responses to the article, both from chief executive Kunal Kapoor and from global director of manager research Jeffrey Ptak, Lutton’s boss.
The pair emphasized the firm’s independence and highlighted the fact that The WSJ’s own analysis found that five-star funds outperform four-star funds, which outperform three-star funds, which outperform two-star funds, which beat one-star funds.
‘That’s not a mirage. That’s tilting the odds in investors’ favor,’ Kapoor said.
Lutton says Morningstar is self-critical and often reviews its methodologies to see if there are ways it can make them better.
‘That culture applies to the Star ratings, the Analyst ratings and all our other methodologies,’ she says. ‘It is one of the reasons we have made so many changes to those methodologies over the years. Frankly the Star rating has been pretty static, but if you look at the number of categories that we use to classify funds, that has changed quite a bit over the years as we try to refine those categories and make them better representations.
‘The Analyst ratings’ introduction about six years ago was really an attempt on our part to be more forward-looking, which was one of the points of the article. We know there are limitations to looking at past performance and we wanted a tool to help investors identify what we think is most likely to happen in the future. That’s what the Analyst rating is designed to do.’
HOW THE ANALYST RATINGS WORK
The Morningstar Analyst ratings give a forward-looking assessment of a fund’s ability to outperform its peer group or a relevant benchmark on a risk-adjusted basis over a full market cycle. Ratings are continuously monitored and re-evaluated at least every 14 months. They are assigned to funds that have garnered the most investor interest and assets. Funds are assessed on five key pillars – People, Parent, Process, Performance and Price. Each evaluation is carried out through face-to-face interviews with the fund management team, along with analysis of proprietary Morningstar data and fund documents.