A Surprising Trait of Outperforming Funds

It can be hard sometimes to pay attention to how good a company or mutual fund is, or to how well it behaves. Socially responsible investing is an appealing approach, but let's face it -- what most of us really want is performance. This is our hard-earned money, after all, and we need it to grow.

Here's some good news, though: It seems that in many cases, being good can pay off. I've written before about links between good performance, attention to sustainability, diversity in companies, and women in management, for example. If you're looking for female CEOs at companies with a long history of strong stock performance, for instance, check out Indra Nooyi of PepsiCo (NYSE: PEP  ) , Susan Ivey of Reynolds American (NYSE: RAI  ) , and Andrea Jung of Avon (NYSE: AVP  ) , among many others.

And here's something else I just learned: It seems that a study by Jay Wellman of Cornell University and Jian Zhou of Binghamton University has linked a mutual fund's stewardship rating at Morningstar to better performance. Specifically, funds graded A or B outperformed those graded D or F with average annual returns that were 1.6% higher.

That's enough to make quite a difference. Imagine, for example, investing $10,000 and earning an annual average over 25 years of 8% vs. 9.6%. With the 8% return, you'd end up with about $68,500. With the 9.6% return, it would be nearly $99,000, a difference of more than $30,000!

What to do
So, how should you use this information? Well, when you study a fund, you might want to pay attention to its Morningstar stewardship rating. You might, instead, just focus on the related aspects of the fund that the researchers found matter the most: the quality of the board of directors, and its fees.

For more suggestions for some top-notch mutual funds, try our Motley Fool Champion Funds newsletter, for free. Many of them sport solid stewardship grades, in part because our fund analysts are by nature interested in good governance, low fees, and so on. One recent recommendation, for example, has a grade of A, a market-trouncing 10-year average return of 8%, a low expense ratio, and top holdings that recently included Apache (NYSE: APA  ) and Diageo (NYSE: DEO  ) . Another recent pick was also rated A and had market-beating results, a very low expense ratio, and top holdings that recently included Amgen (Nasdaq: AMGN  ) and Southwest Airlines (NYSE: LUV  ) .

Frustrated with your 401(k)? Even if your employer's plan isn't the greatest, you don't have to give up your dreams of a happy retirement.  Get the tips you need to turn your retirement savings around in our special report, "How To Make The Most of Your 401(k)" -- just click here for instant free access.

Longtime Fool contributor Selena Maranjian owns shares of PepsiCo and Amgen. Diageo and PepsiCo are Motley Fool Income Investor picks. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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