Research conducted by Lipper and GovernanceMetrics International (GMI) examined mutual fund holdings based on GMI’s 1 to 10 rating scale – 10 being a company’s board of directors that is truly independent. While only 41% of GMI’s database received a rating of 7.5 or higher – denoting governance practices of “above average” or “well-above average” – 56% of the average Large-Cap Value fund, 55% of the average Large-Cap Core fund, and 48% of the average Large-Cap Growth fund retained these investments.
Breaking it down even further, the research assigned a weighted average score based on the funds’ corporate governance holdings. Among the 10 highest scores in the large-cap value category, their three-year return was 0.84% and the five-year return was 2.37%. Comparatively, those with the lowest weighted average governance scores had three-year returns of -0.35% and five-year returns of 3.33%.
Similarly, the top 10 large-cap core funds had three- and five-year returns of -5.53% and 0.90%, respectively, versus -7.30% and -0.74% three- and five-year returns, respectively, of the bottom 10. Among large-cap growth, the top 10 had three- and five-year returns of -5.74% and 0.57%, respectively, versus -10.88% and -1.00%, respectively, among the 10 lowest scorers.
On an individual basis, among large-cap funds with the strongest average governance ratings for portfolio stocks, the funds with the highest 3-year annualized returns were:
- Northern Funds Large Cap Value
- Hennessey Total Return
- ING Corporate Leaders
- TD Waterhouse Dow 30.
Conversely, among the large-cap funds with the poorest average governance ratings, the funds with the lowest 3-year annualized returns were:
- ASAF ProFund Managed OTC
- Van Kampen Select Growth
- Jundt Twenty-Five
- Gartmore Focus
- Janus Mercury.
To arrive at these figures, the two firms paired the stock holdings of 725 large-cap domestic equity mutual funds portfolios in Lipper’s database with the governance ratings calculated by GMI for more than 1,000 publicly traded firms. The full report will beposted at http://www.research.lipper.wallst.com/researchSeriesIntro.asp .