Funds managers indifferent on past performance

Australian funds managers reacted indifferently to the level of influence past performance has had on their fund ratings by research houses,TheMoney Management Rating theRaters Surveyhas revealed.

The survey found that 85 per cent of the funds managers felt past performance should only have some influence on manager ratings. Ten per cent believe that past performance should have no influence at all, while the remaining five per cent of funds managers stated that past performance significantly influences manager ratings.

In the past year, funds managers have repeatedly voiced the scorn they have felt at the hands of research houses, but despite being given the opportunity to hit back at the raters, funds managers are sitting on the fence.

Credit Suisse Asset Management head of retail funds Brian Thomas is not surprised by the response from his fellow managers, saying the results just reflect the philosophical problem in research — the only factual information is past performance.

“Funds managers are being politically correct and it reflects a level of acceptance of the process,” he says.

Thomas says if past performance is bad then funds managers are more inclined to say it is not that relevant because the focus should be on their processes. If the rating is good, then they leverage off it, he adds.

In November last year, Frank Russell Company’s Australasian managing director Alan Schoenheimer challenged the ratings methodology of research giant, Morningstar, and its use of past performance in its ratings.

In a report released by Frank Russell, he found that $1,000 invested in an average five-star rated Morningstar fund between June 1998 and June 2000 would have produced $1,460 at the end of the two-year period. However, $1,000 invested in a four-star fund would have produced $1,588, despite the fund’s lower rating.

The report looked at the relationship between star ratings and immediate past performance, and found that there was only a slight correlation between the two. Schoenheimer claims that if a fund has a high star ranking today, it is likely to have performed well in the previous 12 months.

This point is echoed by IWL Research (InvestorWeb) senior investment analyst David Smythe.

“We agree that past performance is a poor indicator of future returns and quite often the star performer one year will be the cellar dweller the next,” Smythe says.

“As such, short-term performance is not critical but rather longer term performance is used as an indicator of the manager’s robustness of style, ability of personnel and whether what is being documented in terms of process is in fact being carried out,” he says.

Smythe outlined IWL’s research procedure in using past performance in ratings, stating IWL’s research is a combination of qualitative and quantitative criteria, split 50/50. He says while all these quantitative attributes are historical, they also give the analyst an indication on whether the portfolio is being managed ‘true to label’ and thereby influence IWL’s qualitative or forward looking view.

Research house Assirt takes a slightly different view. Commenting on Schoenheimer’s stance, Assirt associate director Anthony Serhan says they have been vocal about the point that past returns are no guarantee of future returns.

“When we do look at performance it is with a view to understanding the way a manager manages money and their ability to add value against the benchmark -— not their ranking,” he says.

Assirt’s use of past performance ratings looks at five years for equity products and three years for other products. Serhan says the group does not look at straight performance. Assirt assesses risk adjusted results and performance against the relevant benchmark.

The group also does not use peer group performance because Assirt is not interested in rewarding the best of a bad lot, he says.