Rate the Raters 2010

The results of the annual Money Management Rate the Raters survey have shown research houses are still in favour. However, there is still room for improvement. Angela Faherty reports.

The turbulent nature of the investment market over the past few years has seen research houses come under increased pressure as greater scrutiny was placed on the ratings assessments they hand out to investment products.

Charged with the responsibility of rating good and bad products, research houses have found themselves well and truly under the spotlight.

The collapse of a number of investment houses coupled with the issue surrounding the fees they charge their clients has led many research houses to defend the research methods they practice as well as the ratings they give to fund managers.

Yet despite the difficulties many research houses face, the results from the 2010 Money Management Rate the Raters survey demonstrates that many research houses are still hitting the mark when it comes to quality and customer satisfaction.

While many fund managers do not always like the assessment they have bestowed upon them by ratings agencies, it is clear from the findings that quality of personnel and depth of research are highly valued.

This year’s survey was conducted in the same manner as last year’s and saw the analysis of each research house across a number of areas. Fund managers were asked to rate each firm on a number of criteria rather than against each other.

This meant that instead of naming a winner, our survey focused on the individual results and rankings of each house in order to gain an insight into how fund managers felt about each research house and what they considered valuable qualities in the business.

While there were strengths and weaknesses to be found among all players, it was also clear that some research houses were well regarded across the board by fund managers.

Lonsec was consistently rated highly by survey respondents, while Zenith, which made significant ground last year, was also praised for quality across a number of areas.

However, it is fair to say that no one research house excelled in all areas and improvements among all can certainly be made.

What was clear from the survey results was that demand for quality and consistency within the industry is considered to be of paramount importance.

Regardless of the outcome of the ratings assessment, respondents highly valued continuity among staff and a transparent assessment process.

The quality of feedback from research houses was also important, with many ranking the analysis of results and ratings as a key requirement in the relationship between research house and fund managers.

In the survey, fund managers were asked which research houses had reviewed or rated them during the last 12 months. Lonsec had rated almost all of the respondents (96 per cent), while Standard & Poor’s (S&P) and Zenith were not far behind, with 91 per cent and 83 per cent respectively.

One interesting element of the survey was the judgment of the ratings handed out by the research houses. In the main, the majority of those surveyed thought the ratings they received were an adequate representation of their product offering.

Ratings from Lonsec and Mercer were both highly regarded with an ‘excellent’ vote of 50 per cent and 42 per cent respectively and a ‘fair’ vote by 45 per cent and 50 per cent respectively.

However, despite this, the turnaround time delivered by each research house was an area where all firms could certainly do better. In the main, respondents considered the turnaround time of many research houses to be good, yet a significant proportion of the votes sat in the ‘average’, ‘below average’ or ‘poor’ categories.

Lonsec did well in this category; 62 per cent of respondents said turnaround time was ‘good’, while Zenith received 42 per cent and Morningstar 44 per cent in this field.

However, Zenith, S&P, van Eyk and Morningstar also collected ‘poor’ ratings in this category, albeit a relatively low percentage.

Lonsec

When it came to individual research houses, Lonsec remained a favourite among fund managers, with the research house scoring well across all categories.

The firm did particularly well in the research methodology field, where 36 per cent of respondents considered it excellent and 50 per cent said its research methods were good.

Grant Kennaway, general manager of research at Lonsec, said its transparency and consistency was what kept it ahead of the game.

“There are a number of critical ingredients that combine to produce a quality investment product and Lonsec’s key beliefs are central to our research process and provide the framework for our assessment of managed funds across all asset classes.

"We have a large, experienced and stable research team that has the necessary skills to implement the process effectively,” he said.

On the whole, Lonsec was also highly regarded when it came to turnaround time. The firm was the only research house not to receive a ‘below average’ or ‘poor’ rating in this category, a significant achievement when the sheer volume of products available in the market is considered.

Kennaway credited Lonsec’s vast and highly experienced team as the reason for the firm’s efficiency. “Lonsec operates to a disciplined review schedule and always aims to have appropriate resources available to ensure research is relevant and up-to-date.

The heads of each of our research teams have extensive industry experience and have been with Lonsec for many years. This helps to ensure that objectives concerning research quality and timelines are met,” he said.

One point of importance for many of the survey respondents was the feedback received from the ratings houses. Lonsec’s feedback process was rated as ‘above average’ by 64 per cent of those surveyed and as ‘average’ by the remaining 36 per cent.

Kennaway said Lonsec gaining acknowledgement for its research reports was very satisfying, particularly when its focus is on being clear and concise.

“Lonsec’s reports are focused on analysis and opinion and this transparency and focus on what advisers need to receive in their research offering has helped us deliver a research product that will hopefully continue to be relevant to our market,” he said.

Zenith Investment Partners

In last year’s survey Zenith had started to garner favour among fund managers, who rated the research house highly when it came to turnaround time and the quality and experience of key personnel.

This year, Zenith continued its success when it came to personnel and the quality of time the research house spent with fund managers during the assessment period. 74 per cent of respondents said they spent between two and four hours with the research house and a further 10 per cent said they spent more than four hours with the firm.

David Wright, director at Zenith Investment Partners, said the assessment process was very detailed and spending quality time with fund managers was vital. “It is very pleasing to get feedback from fund managers who feel we are doing things well.

Spending time with them during the assessment process is crucial as it is imperative to understand how they manage money, the characteristics and structure of the investment team and the way they conduct business. We need to spend as much time as it takes to understand all these processes,” he said.

The transparency of Zenith’s ratings process was also highly regarded, with 53 per cent rating it as ‘excellent’ and 42 per cent as ‘average’. Wright attributed this to the fact that the firm sits down with every manager and explains its ratings procedure thoroughly.

“We spend a lot of time informing the managers of the approach we use and the criteria we have adopted. We also explain at the end of the process how we arrived at the rating, and while some managers may not always agree with the outcome, they appreciate the fact that they have been furnished with the rationale of our decision and understand the manner in which we reached our decision,” he said.

Zenith again received praise for its quality of personnel, scoring 47 per cent in both the ‘above average’ and ‘average’ categories.

The research house has a solid track record, with only one departure from the firm in the eight years it has been operating, a fact Wright believes is important in establishing relationships with fund managers.

“The managers enjoy the fact that they do not have to start from scratch every time they meet with our analysts; they see the same one year after year. This allows the research team to build up an intellectual property on the manager and prevents the need to start from ground zero,” he said.

Standard & Poor’s

Another research house to attain one of the highest ratings when it came to spending time with fund managers was Standard & Poor’s, with 67 per cent of survey respondents having spent between two to four hours with the research house.

The quality of time spent with each fund manager was vital in order to clearly understand the product offerings available in the market, yet using this time wisely was more important, said the managing director of funds services at S&P, Mark Hoven.

“The level of preparation the analysts have completed before meeting the manager, and their prior familiarity with the manager, is important so the meeting is not spent going over the basic information that can be obtained from an [Investment and Financial Services Association] document or gathered from other sources beforehand.

"The focus of the meeting should be to test the abilities of the fund manager.”

Hoven added that S&P’s practice is to send two fund analysts to every review meeting to provide more than one perspective and enable more debate and discussion to occur in each meeting.

The range of products covered was a key strength for S&P, which scored highest in the number of products rated; 57 per cent for two to five products and a further 33 per cent for more than five products.

This result tied in with S&P’s philosophy that it is essential to provide broad coverage for wealth management clients so they could provide recommendations about good and bad products.

“Some research houses only provide reports on ‘recommended’ products but we also provide ratings and full reports on lower rated products that may not be seen as investment grade by our clients.

"This gives the wealth management clients information about what we perceive as the issues with these lower-rated products,” Hoven said.

Mercer

When it comes to hitting the mark for quality and experience of personnel, Mercer is at the top of its game. The research house received the highest ratings in this category, with 67 per cent giving the personnel the top ranking ‘above average’.

It also attained an ‘average’ rating from 33 per cent of survey respondents.

Marianne Feeley, principal at Mercer, attributed its quality in this area to the fact that its researchers have an average of 14 years experience in the financial services industry. Researchers are also organised into four asset class boutiques: equity, bonds, real estate and alternatives, in order to create sector specialists.

“Within each boutique researchers collaborate to ensure consistency of views and also to leverage experience in any one geography so that our expertise is available to clients in all geographies.

"Researchers also communicate across boutiques on specialised investment types or on issues that are not particular to one asset class,” Feeley said.

Mercer fared well in the turnaround time it delivered to fund managers, but improvements could be made, with 33 per cent giving the research house a good rating in the category. 50 per cent said it was average.

“Once the due diligence is complete, Mercer researchers aim to produce a review and to recommend a rating within four weeks.

"Because our research is first and foremost for our clients, we do not have specific timelines for communications of ratings to fund managers. However, we are happy to provide feedback to the manager if they contact us after our review is complete,” she said.

Morningstar

Research house Morningstar performed reasonably well in the 2010 Rate the Raters survey, faring better in some categories and below average in others.

However, it must be noted that the firm has a slightly different business model in that it does not run a pay-for-review ratings process and its clients are advisers and financial planners as opposed to fund managers.

That said, respondents rated Morningstar reasonably well with a 6 per cent voting score of ‘excellent’ for turnaround time and a further 44 per cent vote for a ‘good’ performance in this category.

Chris Douglas, co-head of fund research at Morningstar, said he believed the results were fair but stressed there would be improvements.

“Given the recent expansion of our team and new client-focused initiatives, we expect to see further improvement in this area going forward.

"We have been placing increased emphasis on turnaround time in the past six months and we think it’s vital to communicate our investment views on a fund manager into the market in a prompt fashion, rather than just have an old report sitting in the shelf,” he said.

Douglas added that as part of these plans to improve turnaround time, Morningstar had committed to updating its ‘highly recommended’ and ‘recommended’ reports every six months since the beginning of 2009.

The research house added that when it came to the transparency of its ratings, it was likely to score below others in the peer group as the publication of both favourable and unfavourable assessments makes it different from other research houses.

Van Eyk

Another research house that operates a different business model to many of its peers is van Eyk. The research house does not accept fees and has long been perceived as a slightly different type of researcher.

Van Eyk is still well regarded in many categories and scored highly in the length of time it spends with fund dealer groups and the number of products it rates.

The research houses’ research methodology is still highly regarded; 16 per cent of survey respondents considered its methodology excellent, while 47 per cent rated it ‘good’.

Mark Thomas, chief executive at van Eyk, said: “We feel that an important distinction between van Eyk’s research methodology and others is that we have a subscriber model in which no manager pays for a review.

"No other major rater does this and virtually no other major credit rating agency does this. Independence of analysis is therefore a major distinguishing factor for van Eyk.”

While van Eyk scored highly in the quality of personnel category in last year’s survey, the plethora of changes at the firm over the last 12 months has clearly taken its toll, with the firm failing to perform as well as its peers in this category.

Although van Eyk received 17 per cent in the ‘above average’ category and 61 per cent in the ‘average’ category, almost a quarter of survey respondents (22 per cent) placed van Eyk in the ‘below average’ field.

“While there has been an ‘above average’ level of change at van Eyk last year we’ve increased our market share with the appointment to AMP Financial Planning.

"This tender process was against a broad universe of competitors in the research market and was an exhaustive process focusing heavily on quality of personnel and independence of process.”