Morningstar officials are hoping that the fund-tracker's new rating system will encourage fund firms to shutter the dogs of their line-ups more quickly. The revelation was made by Don Phillips, managing director at the Chicago firm in an interview with the Boston Globe.

Phillips also said fund investors and fund managers have built different expectations about the role of funds. Many investors, says Phillips, still look at their fund managers as strategic asset allocators, yet managers see themselves as stock pickers within an asset class.

"I talked to a lot of investors who during the bull market said, 'If we get a bear market, I certainly hope my manager is smart enough to go to cash.' Yet I had talked to their manager the week before and he was saying, 'My job is to stay fully invested in stocks at all time.' Managers were assuming that the buyer had made the decision to buy the fund because they wanted stock exposure."

Phillips also told the paper that fund companies have inverted the intent of the Forty Act. Rather than putting shareholders on top and considering themselves as employees or stewards, fund firms are taking a marketing approach to the industry. Said Phillips:

"The major thing would be to get this notion of trusteeship back into the industry, the idea that the fund shareholder is the owner. The [Investment Company Act of 1940] goes out of its way to put the investor at the top of the pyramid, as the owner, with the fund management company as the employee."

"Fund companies have inverted that to say, 'We'll create a product and sell it through supermarkets or other distribution networks to customers.' That structure sort of puts the investor at the bottom of the pyramid, where they are at a disadvantage."  

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