It’s been a tough year for ratings houses, which have gone through their own tumultuous period with big names leaving, processes undergoing revision and structures changing.
At the same time, fund managers remained less than impressed with the performance of research houses, with the key issues of fees, accountability and influence once again rising to the fore.
In fact, 84 per cent of managers responding to this year’s Rating the Raters survey said they had paid fees to be rated or have a rating published. Of this same group, only 21 per cent of managers thought they should be required to do so.
This raises the question of on what basis do research houses operate if fund managers do not want to pay fees for either being rated or having ratings published, which are two of the most used methods by research houses to generate revenue.
But it is easy to understand why fund managers feel this way about fees and ratings when 79 per cent of them state that the payment of a fee could compromise the ratings provided, up from 55 per cent in last year’s survey.
Once again the issue of revenue for research houses is involved, but managers are genuinely concerned given that nearly 95 per cent believe research houses should be accountable for their recommendations.
This seems like a fair call if managers are paying for research ratings and offers an opportunity for research houses to deflect criticism that fees compromise their work.
But what lies at the heart of the matter is that fund managers would like research houses to give them the same information and transparency they must provide to the research houses themselves.
In fact, 100 per cent of respondents to the survey stated the ownership and financial influence of research houses should be fully disclosed, echoing last year’s results in which 90 per cent of managers also called for disclosure.
But despite responses surrounding the issue of fees, it was evident that fund managers understood that research houses are commercial enterprises, with respondents fairly evenly split about whether research houses should be able to operate their own platforms or provide implemented consulting.
They also increased their understanding of the fact that most research houses use research as a way of leveraging into other business areas.
For example, just over 47 per cent of fund managers recognised this withMorningstar, up from 22 per cent last year.
Assirt’s figures for this question climbed from 62 to 68 per cent, whilevan EykandInvestorWebclimbed from 53 and 59 per cent to 63 and 65 per cent respectively.Lonsdalewas the only group to suffer a reverse here with 47 per cent of fund managers identifying the leveraging in the business, down from 53 per cent last year.
However, the flip side of this was that while fund managers understood research houses leverage into other business areas, only 27 per cent of managers could clearly differentiate what these services were compared to other ratings houses. But while this figure is low it is still an improvement on last year when only 10 per cent of managers could make the same claim.
In yet another unusual reversal of form, 84 per cent of fund managers did state that research ratings helped to benchmark businesses against competitors, despite the fact the survey reveals a lack of understanding of research house processes and services on offer, while recognising to an extent that they are commercial groups operating a business service.
So when it comes down to it, did the fund managers rate the ratings houses and what were their judgements?
There is no denying that van Eyk Research remains highly regarded among fund managers, while Assirt, InvestorWeb and Lonsdale have maintained their place in the market (see table).
Morningstar, on the other hand, has not fared as well with more than half of fund manager respondents stating their overall impression of the group was below average. Further evidence of the group’s fall from grace include that 50 per cent of managers felt the ratings house had no impact on their inflows or outflows and 41.3 per cent of managers rated by Morningstar were also very critical of its professionalism.
To be fair to Morningstar, it has been through a turbulent period with high staff turnovers, the adoption of a new strategy and the roll out of new products.
But on the other hand, it is precisely this type of action within a funds management house that often sees it saddled with a poor rating that is only lifted after a reversal in fortune.
On this basis, all the research houses may find it hard to be critical of industry opinions of them, especially if they want to be measured by the same yardsticks, or as a funds manager respondent put it: “What about managers putting research houses on hold due to lack of staff or staff departures.”
This type of action is unlikely in the short-term due to the power that ratings houses still have, but if nothing else comes out of this survey, it should be abundantly clear that fund managers are still seeking more from the precarious relationship the two groups maintain.
