Rate the raters 2009: The seeds of a new status quo

I n a time when investment decisions hold greater weight than ever before, research houses have certainly felt some pressure. Charged with the responsibility of rating fallible products — many for fees — in recent times they’ve found themselves having to defend previous judgments, pointing to warnings they included in their initial assessments.

Yet while the dust has somewhat begun to settle in the research house universe, a series of high profile investment company collapses mean they may be defending their ratings processes for some time to come. Subject to a fair amount of scrutiny over the years, researchers remain under the microscope when it comes to how they rate fund managers.

This time, it’s different

As with any market cycle, it’s a time of renewal, and an analysis of the results from Money Management’s 2009 Rate the Raters survey demonstrates fund managers are taking a flight to quality. While fund managers do not, understandably, always like the outcome of a ratings process, they have indicated they certainly value a sound and transparent ratings process — and a rating from the most respected research houses.

This year, we analysed how the research houses measured up on an individual basis: fund managers viewed each researcher differently, with clear strengths and perceived weaknesses emerging.

Accordingly, rather than naming a clear winner, we looked at the individual results and rankings for each house in order to gain a meaningful idea of how managers feel about them, and what they truly value. Our detailed analysis builds a strong picture of how these houses are viewed within the industry.

However, it should be said that some research houses are well regarded across a number of measures. Lonsec was rated highest by survey respondents when the results in all categories are considered, with Zenith, somewhat unexpectedly, garnering strong regard across most of the benchmarks, including quality of personnel. Van Eyk was consistently ranked in the top three or four research houses, however, it should be noted that it does provide a somewhat different offering to the other research houses.

In the survey, managers were asked which research houses had reviewed or rated them in the last 12 months: only Lonsec had rated them all, while Standard and Poor’s, van Eyk, Morningstar and Zenith Investment Partners weren’t far behind on the ratings counter.

But there is a considerable and clear shift in the landscape. Perhaps a little surprising is Morningstar’s near disappearance from the fund manager radar. Placing equal second last year with Mercer, the research house received lukewarm ratings overall this year, performing strongest on turnaround time and transparency of the ratings process, but still falling behind other major houses.

And in what is perhaps another surprising development, Zenith has picked up its game in the last year. Barely registering a presence in the 2008 survey, the research house has been recognised as a serious contender, and is well regarded for its ratings process overall, getting nods in a number of categories.

Lonsec

Lonsec remains a favourite among fund managers, having taken first place for the last four years. In 2009, the research house was once again commended, ranking as the preferred house in research methodology, transparency of the ratings process, and the ratings it gave managers.

“Lonsec has developed a disciplined and transparent methodology for the research of investment products across a range of sectors,” said Grant Kennaway, general manager — research, Lonsec.

“Our research approach is focused entirely on servicing financial advisers and delivering a research product that is tailored specifically to their needs.”

And a great deal seems to come down to the strength of the research team.

“We have organically built the team to over 30 analysts but have been able to maintain a strong ‘small company’ culture,” Kennaway said.

He added that the Lonsec research team members have extensive experience in the investment industry, with backgrounds spanning a variety of well-regarded funds management, banking and investment research houses.

Respondents further indicated that Lonsec was a house they sought to have multiple products rated by, not far behind van Eyk and Aviva Research. They also valued Lonsec’s advice, and noted that Lonsec, for the most part, spent a considerable amount of time with managers.

“Research should be forward-looking and qualitatively skewed. Qualitative assessment involves extensive contact with key investment professionals,” Kennaway said. “Rigorous internal peer review by the Lonsec team is also a critical component of the research process.”

Zenith Investment Partners

While the research houses garnered a variety of responses — and sentiment — Zenith is clearly well regarded. Coming up as the preferred researcher in terms of turnaround time — a notoriously sticky issue — the Zenith team also got a significant nod for the quality and experience of the personnel dealing with the managers.

“I’m very pleased to see we have been well rated on [turnaround time] as it is an area we concentrate on strongly in an effort to differentiate our business from competitors,” said David Wright, director, Zenith.

“This is an area where research houses have been criticised in the past. We strictly adhere to a 12-month rating cycle for all asset classes as we believe dealer groups expect that each asset class is reviewed on a formal basis every 12 months.

“To date, we have been successful in achieving this goal through a combination of adding further resources to our analyst team and strong use of quantitative and qualitative filters to identify those funds in each asset class we conduct full due diligence on.”

Wright also emphasised the importance of a strong and capable team, saying stability has helped them score well in this regard.

“The fact that the senior people in the business are equity holders has assisted greatly in retaining high quality people. There are not many other teams with the length of tenure in research … and we believe it certainly helps to have people who have experienced a number of investment cycles,” Wright noted.

Zenith was also well thought of in terms of its transparency in the ratings process, something Zenith’s head of research, Ben Davis, has specifically focused on this financial year.

“That is, providing clearer documentation on how we identify, research and then rate funds, so it’s pleasing that managers feel they understand our process,” Wright said.

As for the amount of time Zenith representatives devote to the managers — an area in which it also scored well — Wright said its approach is simple.

“Take whatever time it takes to fully understand the manager’s team structure and process. We believe we ask sensible questions and drive the agenda rather than have managers present to us, and managers seem to respect this approach.”

But the regard doesn’t stop there for Zenith, with respondents commending its ratings as well as its research methodology.

“We’ve always felt that clear descriptive ratings that leave nothing to interpretation is what clients are seeking. That’s why we use ‘highly recommended’, ‘recommended’, ‘approved’ etcetera, which describes in a word exactly what the rating means,” Wright explained.

Simplicity seems to be the key for the team at Zenith, even in relation to its research methodology: identify the best managers in each asset class and investment style, and highlight those via Zenith’s ratings to their dealer group and adviser clients.

“I think managers like the fact we don’t waste their time on funds that do not make the grade and highlight those funds we rate highly.”

Van Eyk

The flight to quality is perhaps most apparent when it comes to seasoned research house van Eyk. We all remember the UBS saga of many moons ago, where UBS, unhappy with the ratings van Eyk were giving to its products, refused to be rated by them. The survey results demonstrate that van Eyk has not waivered in its underlying, firm approach, nor has dealer group regard diminished.

The research house, which doesn’t accept fees, has emerged as the preferred research house when it comes to the amount of time spent with managers. At a minimum, representatives spent two hours, but for the most part, van Eyk personnel spent over four hours with managers, not an insignificant aspect to its ratings process.

“We take real pride in the quality of our research. A large part of this is understanding the value proposition of each fund manager,” said Mark Thomas, director at van Eyk.

“This involves spending time with them in their offices conducting interviews at multiple levels of the organisation. There is no way around this other than doing the time with the fund manager.”

Van Eyk also received favourable responses to the quality and experience of its personnel, once again pointing to a process regarded well for its focus on quality.

“Research is not considered a training ground or stepping stone to other vocations at van Eyk. Thus we are looking for people who are career analysts and passionate about what they do. In many cases we have hired people who have fund manager experience and can bring that experience to the table,” Thomas said.

Interestingly, while not emerging on top in many categories, a large number of respondents indicated a preference for a van Eyk rating, having sought to have more than five products rated by the house (tying with Aviva Research).

Lonsec fell in behind van Eyk on this front, with Standard and Poor’s (S&P) also being a preferred researcher for a multiple of products.

S&P were also recognised for the amount of time they spent with managers, in some cases over four hours.

Another highly valued component of the ratings process is the feedback managers receive from the researchers. Mercer is the preferred research house in the category, with Lonsec and van Eyk also well regarded when it comes to feedback.

“We recognise that managers have taken the time to prepare for their meetings with us and we are happy to provide basic feedback on the reasons for a rating subject to a few conditions, which reflects the fact that our manager research activity, above all, is for our clients,” said Marianne Feeley, Mercer’s head of manager research, Asia Pacific.

Elsewhere, Mercer was found to be well regarded in relation to turnaround time, and it was rated fairly well for the ratings it ultimately gave.

“Our primary goal is to provide clients with up-to-date views on the investment products that we review for current or future inclusion in portfolios,” Feeley noted on turnaround time.

As for its ratings, Feeley pointed to a quite rigorous research process.

“[It] includes an internal challenge mechanism, which is intended to ensure that the ratings reflect our confidence in prospects for future outperformance.”