Just two of 26 mutual fund companies get top marks from Toronto-based Morningstar Canada in its evaluations of how well firms have aligned their interests with their unitholders.

The fund research firm has published the latest version of its so-called “Stewardship Grades”, which aim to assess how well fund management firms have aligned the interests of the firm with those of their fund investors.

Only two of the firms rated by Morningstar receive an “A” on their latest report cards: Capital International Asset Management (Canada), Inc. and Steadyhand Investment Funds, Inc.

Conversely, at the bottom of the rankings, three firms earned a barely passing grade: AGF Management Ltd., BMO Investments Inc., and Sprott Asset Management Inc. each scored just a “D”. Of the remaining marks, 10 firms earned a “B” grade, and the remaining 11 receive a “C”.

In the 2011 edition of these grades, four firms received an “A”, seven rated a “B”, 13 earned a “C”, and two firms got a “D”.

Morningstar says that the grades for each fund company are based on four basic criteria: corporate culture, which represents a qualitative assessment of efforts to put investors first, including low manager turnover, communication with investors; management incentives, which examines how well manager and investor interests are aligned in terms of rewarding returns rather than asset gathering; fees, including a consideration of low-cost distribution options; and, regulatory issues.

The research firm says that each year’s stewardship grades are independent from previous years. “The 2012 grades are meant to stand on their own, based on information provided by fund companies this year, complemented by our opinions formed over the years,” it says.

Additionally, it notes that its scoring process is evolving over time. “For example, this year we made a greater effort to compare fund companies’ fees only to others in similar distribution channels. Comparisons are now limited to either full-trailer or low- or no-trailer competition, based on the most prevalent offerings by each company,” it reports.

And, it says that improved transparency by fund companies has also aided the process. “As survey participants have become more accepting of our process, they have in most cases been more willing to reveal information critical to our grades. This disclosure has often reflected positively on the firms’ grades,” it observes.