Funds managers have no answers to research house woes

Funds managers remain divided over what is the best mix of qualitative and quantitative research used by a research house to devise a fund rating.

While 35 per cent of the largest funds managers in Australia perceived a 75/25 split between qualitative and quantitative research as the most appropriate mix, another 35 per cent also perceived a 50/50 split in the same light.

The remaining 30 per cent of respondents were split between 20 per cent who favoured a more quantitative approach (with up to 100 per cent emphasis on quantitative research), and 10 per cent who favoured a more qualitative approach to research (as high as 99 per cent for qualitative research).

It is also interesting to note that in table 1, the majority of funds managers who considered themselves large or mid-size preferred more of a qualitative emphasis on research, while boutique funds had an even split between more of a qualitative emphasis and a 50/50 approach.

This could reflect the generally strong performance results boutique funds managers achieve and therefore their willingness to be rated based on quantitative research that focuses on past performance.

These results reflect the views of Australia’s largest funds managers that together account for more than 80 per cent of the industry’s funds inflow, and comes at a time when many funds managers are openly questioning the value and dynamics of research houses and their processes.

Table 2 shows what respondents perceived to be the qualitative and quantitative mix for each of the research houses and what is in fact the weighting given by the research house.

The results show Lonsdale was the only research house where funds managers’ perception of their mix was different to the reality.

Lonsdale head of managed funds research Anthony Garvey says it is not the exact splits between quantitative and qualitative research that matters most to funds managers. Rather, it is the various research houses’ approach.

“We try not to formalise the split ourselves. We do a combined approach which is qualitative focused and use quant as backup,” he says.

The Australian research market is characterised by its use of an integrated approach of qualitative and quantitative research in developing a rating for a fund manager.

However, in the US, research is more quantitative in nature. Van Eyk Research director Rob Prugue says the sheer volume of products on offer in the US market (over 3,800 equity products available alone) makes it too costly and time consuming to also include qualitative research.

“Qualitative research is very labour intensive. You can’t quantify quality issues,” he says.

However, while in Australia a split between quantitative and qualitative theory may be both historical and desirable, it seems funds managers are not at the stage of knowing exactly what combinations they should be.

According to Moringstar head of research Daisy Chee, the split between qualitative and quantitative research employed by a research house is incidental to a funds manager that prefers to focus rather on who they consider to provide the most well regarded research in the industry.

“Research houses come up with their own methodology and I think funds managers are attracted to those with influence on the marketplace. Funds managers go for the research houses with the most impact on net inflows and outflows,” she says.

Chee says Morningstar’s combination of qualitative and quantitative research reinforces the strengths of both.

“On its own, even the most accurate and up-to-date quantitative research is simply a ‘rear vision mirror’ on the past performance of a fund. On the other hand, forward-looking qualitative research in isolation ignores the fund performance that is the outcome of the business and investment disciplines, philosophies, styles and processes that are qualitatively assessed,” she says.

Chee says Morningstar’s approach is similar to when someone applies for a job. She says while you may think the candidate can do the job and you like them, you still check the candidate’s resume to see what they have done in the past.

Lonsdale’s Garvey says getting an understanding of which research houses provide the best research is important, but also important is getting rated by as many research house lists as possible.

Prugue says while Assirt and InvestorWeb charge funds managers to be rated by them, funds managers that want to be rated by van Eyk only have to put their hand up. He says because there is no remuneration tied to a funds manager’s rating, van Eyk has a different perception of who is in fact the end user of the research, which only serves to enhance its independent reputation and attract more funds managers.

“Fund managers love whatever consultant is able to give them business,” he says.