Rate the Raters 2011

In Money Management’s annual Rate the Raters survey, Lonsec came out at the top of the pack, with Standard & Poor’s close behind. Ashleigh McIntyre analyses the results.

The past year has proved to be an uncertain time for the financial services industry, with research houses being no exception. 

The potential introduction of the Future of Financial Advice reforms has forced many companies to consider the possible consequences for their business. 

But while many changes have already been made in preparation for these reforms, the industry is still uncertain about what the final legislation will look like and the true impact it will have. 

With that in mind, 2011 will be the final year in which the Money Management Rate the Raters survey shines the light on research houses in the context of the current regulatory environment, since there is no doubt that things will soon change. 

As is the case every year, this year’s survey asked fund managers to rate research houses on a number of criteria rather than pitting houses against each other. 

Instead of naming a winner, the survey focused on the individual research houses to gain an insight into how fund managers felt about each research house and what they considered to be the valuable qualities in each business. 

This year’s survey revealed Lonsec to be the clear favourite among fund managers, while Standard & Poor’s and van Eyk appeared to have reaped the rewards for investing in their service offering. Morningstar and Mercer were not far behind, with Zenith seeming to have fallen out of favour with fund managers over the last 12 months. 

Lonsec

Once again the favourite research house among fund managers was Lonsec, which was made evident by the ratings house’s outperformance in almost every category. 

The firm did particularly well in the area of methodology, where 33 per cent of respondents considered it to be excellent, while 60 per cent said its methods were good. 

Lonsec general manager of research Grant Kennaway attributed the favourable rating of its methodology to two things. 

“As a business, we are always trying to incrementally improve. So we certainly do formal reviews of methodology on a regular basis,” he said. 

“The other thing we try and do is clearly articulate our methodology to our clients and the market, so that it is clear to people what Lonsec stands for and what we believe makes up a quality product,” he added.

Another key factor that contributed to Lonsec’s success was its consistent turnaround time, which 77 per cent of respondents were positive about. 

It was also the only house not to receive a ‘below average’ or ‘poor’ rating in this category, which is a significant achievement considering the volume of products rated. 

Kennaway said the size and depth of the firm’s team, coupled with its productivity, helped significantly reduce the turnaround time in the work it does. 

“It’s important to allocate the right amount of resources to produce the work required, and I think we are good at doing that,” Kennaway said. 

Kennaway’s high opinion of his staff was also reflected in the survey, with 63 per cent of respondents rating Lonsec staff as ‘above average’. 

Standard & Poor’s

Investment in turnaround time, transparency and quality of staff has paid off for Standard & Poor’s (S&P) in this year’s survey. The research house received one of the highest ratings from fund managers and was considered to be the most improved firm over the past 12 months. 

S&P Fund Services head of research Leanne Milton said improving productivity and turnaround time without compromising quality had been a focus for the team. 

“A lot of people were really looking for a 12-month cycle, and I know a number of houses haven’t been doing that. Clearly we were one of them a few years ago,” Milton said.

But from 2010 to 2011, S&P has improved its turnaround time by 27 per cent, with part of that coming from increasing the size and depth of the team with three new hires, Milton said.

“We also improved our report templates and our back-office and IT development to help reduce the time analysts spend on non-analytical work,” she said.

Another area in which S&P improved was transparency, with 39 per cent of respondents rating the transparency of the process as ‘above average’, while 57 per cent said it was ‘average’. 

Milton said introducing new research reports has helped to provide greater clarity for fund managers about S&P’s opinions.

“We’ve worked hard on being more transparent with fund managers about our process,” she said.

S&P also performed well in the ratings stakes, with 24 per cent of managers considering their ratings to be ‘excellent’ while 66 per cent thought they were ‘fair’.

Milton said this shift to a more positive view of their ratings process could be a result of having a more open relationship with fund managers.

“We’re not afraid to use our ratings scale and we make a point of explaining the strengths and weaknesses of a fund manager’s strategy after they receive their rating, and I think this promotes an open and honest dialogue about the ratings outcome,” she said. 

Van Eyk 

Despite losing traction with fund managers in last year’s survey, van Eyk staged a comeback this year, seeming to have reaped the rewards for investing in its offering.

First off, it should be noted that van Eyk operates a different model to many of its peers, preferring a subscriber-pays model and not taking payments for research conducted internally. 

One area van Eyk improved on was the quality of its personnel, with 55 per cent of respondents rating them ‘above average’, while 41 per cent said they were ‘average’. 

Chief executive Mark Thomas said the firm had spent a lot of time reinvesting in its core research team and was now back to a full team after making some changes mid-year.

“In certain situations where we lost one person we hired two … or if we lost a person we would hire someone with twice as much experience,” Thomas said.

“I’ve taken a personal interest in most of the senior positions we’ve hired … because culture is important in our organisation,” he said.

Respondents were also particularly pleased with van Eyk’s methodology of research, which Thomas said could most likely be put down to an increase in experience.

“While nothing has changed in terms of methodology, the devil is in the detail and the interaction. Having people that are a bit more experienced involved in the process has made the methodology seem a bit more user friendly.”

One category that received a mixed response from fund managers was turnaround time, which Thomas put down to the business model run by van Eyk.

“We’ve made a conscious effort to make sure we’re back on track with our schedule of delivery, but at the end of the day advisers are our clients, not fund managers,” he said. 

Van Eyk has also consistently stood out as the research house that spent the most time with managers year-on-year. 

Thomas said the firm was not in the business of making a set time to spend with managers, but rather spent as much time as was required. 

“It’s about getting engaged in discussions and asking questions rather than just receiving information, which makes it take longer,” he said. 

Mercer

High-quality and experienced personnel coupled with a sound methodology saw Mercer fare reasonably well in this year’s Rate the Raters survey.

The research house lifted its game to become top firm for quality personnel, with 67 per cent of respondents rating Mercer’s staff  ‘above average’ and 20 per cent giving an ‘average’ rating for the category. 

Fund managers were also particularly happy with the quality of Mercer’s research methodology, with 67 per cent of respondents giving a positive rating, while no negative ratings were received. 

Mercer principal Marianne Feeley said that while there had been no material changes in these areas, time and experience played a big role in the positive outcome of the survey. 

“We have great people and I think they work well together and enjoy what they do,” she said. 

Specialising by asset class was also an advantage for Mercer, Feeley said, as more time working together has helped to boost the firm’s performance. 

While Mercer performed well in most aspects of the survey, there is still work to be done in the categories of turnaround time, transparency and feedback.

Feeley said this tended to be a result of having a different business model to other research firms, namely one that does not accept payment from fund managers for ratings. 

“Our work is for our clients [subscribers]. We’re available to provide feedback, but even then it is not going to be a detailed conversation,” she said. 

Feeley said the shift towards a response of ‘below average’ for transparency may have been driven by the fact that Mercer only tells fund managers their rating, but does not share its output that it shows to clients. 

“Our relationships with fund managers are very important to us and we want to have a collegial relationship … but it basically comes down to the fact that our work is for our client – they are paying for the research,” Feeley said. 

Morningstar

Although Morningstar has a different business model again – preferring to rely on funds from clients (ie, financial advisers) rather than receive payment for ratings – it still managed to perform reasonably well in the 2011 Rate the Raters survey. 

With that in mind, Morningstar did tend to polarise opinion in some categories.

One aspect that had managers disagreeing was the quality of Morningstar’s personnel, which received both high praise and criticism from managers. 

Co-head of fund research Tim Murphy said the mixed response could be a result of his firm’s policy of not hiring people from the research industry.

“We like to hire people who think differently. We think we have a somewhat different way of approaching things and therefore we need somewhat different people to fulfil that capability,” he said. “Some fund managers can appreciate that, and some can’t.”

Respondents were also positive about the rating handed out to them by Morningstar, with 72 per cent believing they were given a ‘fair’ rating.

Murphy said that although most fund managers would love an ideal rating on everything they run, managers are realistic enough to know that won’t always happen.

“As long as they feel that we have been fair, reasonable and transparent in reaching the outcome that we have reached, then they haven’t got a reason to be unhappy with us,” he said. 

The survey also found managers were mixed on the issue of feedback given, with a wide spread of answers from ‘above average’ to ‘below average’. 

Murphy said being open and transparent was fundamental to Morningstar’s approach. “We try to be open and honest with fund managers when we deal with them and we try to be open and honest with dealer groups when talking about fund performance and the calls that we make,” he said.

Zenith Investment Partners

While Zenith performed extremely well in last year’s survey, the ratings house seems to have experienced a slight slump in popularity among fund managers this year.

Director and joint founder David Smythe said that despite this decrease in manager’s sentiment, his firm had not changed its approach and was continuing to implement its ‘best of breed’ model. This model focuses on research depth and deliberately covers approximately half of the number of funds relative to its peers to ensure only funds worthy of consideration for client portfolios are rated.

Smythe said it was probably this same model that contributed to the negative responses received for the feedback category, where 63 per cent of managers cited the feedback given as ‘average’, while 21 per cent thought it was ‘below average’. 

“Some fund managers don’t like being told they fail under a ‘best of breed’ approach, given that under a broad coverage ratings house model ‘everyone gets a seat on the bus’,” Smythe said. 

Zenith were also criticised for the quality of their personnel, with only 17 per cent stating they thought staff were ‘above average’. 

Smythe said that while there had been new additions to the team, these had been quality hires with lots of experience. 

“Furthermore, we have operated the most stable research team in the marketplace for almost nine years now, ensuring consistency of approach and retention of intellectual property,” he said.

In contrast, one aspect fund managers praised Zenith highly for was its turnaround time, with 37 per cent of respondents giving it a positive review, while only 8 per cent were negative – one of the lowest negative scores in the category.

Smythe said the global financial crisis had reinforced the firm’s approach to emphasise depth of research over volume.

By spreading the ratings net too wide, you risk being under-resourced for analysis and the review cycle blows out, Smythe said.

“This means funds are being covered less regularly, in less detail and your turnaround times get stretched,” he added.