Researchers in the spotlight

The annual Rating the Raters Survey conducted by Money Management has once again given fund managers a chance to turn the tables and rank those organisations whose business it is to analyse and dissect their own performance.

Not surprisingly, Money Management allowed respondents to remain confidential when giving their views, due to the slight paranoia felt by most managers that any negative comments could see their funds slapped with poor ratings post-publication.

But despite the natural reticence of fund managers to put their thoughts on paper, the overall response to our questions show fund managers are, for the most part, positive about the work conducted by the researchers.

While recent press headlines have focused on conflict of interest issues where a research house offers additional services, such as a fund of funds or asset consulting, the Money Management survey shows that, despite these misgivings, the overall view is that researchers are professional, understand the market, and offer a good level of service to their fund manager clients.

Frequency of use

Most fund managers will ask to be rated by a variety of research houses, and do so on a frequent basis (see table 1).

A plethora of specialist researchers, such as Property Investment Research, ThreeSixty, Navigator and 5di, also exist to serve the needs of those managers offering more complex investment vehicles.

In fact, there are some that believe that the recent acquisition of Assirt by Standard & Poor’s is a sign of things to come.

“I think there’s too many out there and, as the market shrinks and becomes more attractive, the pure researchers will dominate. I think we’re in a cycle at the moment where there is still some more rationalisation to occur,” one fund manager says.

Research methodology

Across the sector, 50 per cent of respondents say their overall impression of the research methodologies used was either excellent or good, with a further 38 per cent rating the processes as average. In fact, only 10 per cent felt that methodologies were poor or below average.

However, some researchers are still seen as better than others, and the timeliness of the process continues to remain a priority for fund managers.

One comments: “They exhibit a surprising lack of flexibility at times. They are quite rigid in the way they approach things and may not look at something for two years, when there could be structural changes which occur within a particular asset class or sector. And their processes don’t actually allow them to reflect or advise their clients.”

The same fund manager also believes that bigger is not necessarily best when it comes to the size of a research house: “It’s an interesting dichotomy that the bigger you get, the more structured you become, and sometimes you miss opportunities or issues because of your very size.”

Others question the methodology itself.

“There’s too much emphasis in some models on the personalities, the people, rather than the process. Also, there’s a lack of understanding on fund-of-funds. They put too much weight on the fund-of-fund manager, rather than the selected manager. That’s where the emphasis should be, not on the person who’s putting the mix together.”

Cynical, or perhaps realistic, research analysts will claim that most fund managers will stop using a research house if they get repeatedly poor ratings. But that may not always be the case. A large fund management group that participated in the survey told Money Management: “We only use van Eyk because they don’t charge, so as far as we’re concerned, we get free airtime.”

Another claims: “We have withdrawn from one researcher because we felt its methodology wasn’t robust enough and was too subjective. We could never reconcile what it had rated and whether it was good or bad. In fact, it rated some parts of our business better than it should have been, but we couldn’t work out why.”

Transparency of process

An air of mystery seems to prevail when it comes to the research process itself, and while there is general consensus that this should be transparent, in order to allow fund managers to understand how their rating was arrived at, it is also understandable that researchers may wish to keep some things under wraps — it is their bread and butter after all.

In addition, it can be difficult to probe an organisation when it knows exactly what the researcher is looking for and is therefore able to give all the right answers, or is able to present facts for its own benefit.

None of the respondents graded transparency of the ratings process as excellent, although over 40 per cent stated it was good. One-third of the group felt transparency was average, with almost 20 per cent claiming it was either below average or poor.

However, transparency is likely to remain an ongoing area of contention, with one fund manager saying: “The research houses require an annual update from managers on the relevant investment processes, performance and people. I believe this should apply both ways — the research houses should be delivering an annual update to fund managers to outline their research process, whether there has been any enhancements to their process and the people who will be conducting this research.”

Another manager adds: “The lack of accountability for their ratings and transparency in the processes does not assist in moving the industry forward.”

Personnel

When reviewing a fund manager, a research house will pay close attention to the people involved. This includes looking at each individual and ascertaining their level of experience and relevant qualifications, as well as the team as a whole — determining what levels of turnover exist, and the resources available to support the investment team.

But the shoe is now on the other foot, with more attention being paid by fund managers to the quality of the research analysts themselves.

The researchers pride themselves on their human capital, with one researcher saying: “I don’t think anyone could say that our analysts aren’t more qualified than our competitors. They are. I defy them to line up their CVs.”

According to our survey, 40 per cent felt that the depth and experience of the research teams across the sector was excellent or good, with a further 40 per cent saying they were average. Twenty per cent said they were below average or poor.

And the value of people should not be underestimated, with one manager saying: “Research houses need to shore up resources. Dealing with a new face every three months is not ideal. They should be penalised in a similar way to fund managers.”

Capabilities and influence

The somewhat uneasy, symbiotic relationship that exists between fund managers and researchers is due to the inherent ability of a researcher to impact revenue inflow and outflows. As the results demonstrate (see table 2), not one respondent felt that this influence was below average or poor.

So what are fund managers’ views on the researchers’ ability to reflect their investment capabilities?

Given the contentious nature of ratings, the results are somewhat mixed — 37 per cent believe this ability is either excellent or good, another 37 per cent see it as average, while almost a quarter claim it is below average or poor.

There has been increasing discussion on whether research groups should be held accountable for their ratings. But how this could be done remains an unanswered question, with one fund manager saying: “Part of me says yes, absolutely. But the next question is how, and I have unfortunately never been clever enough to come up with the answer to that.”

There is, of course, the theory that clients can always vote with their feet — if the quality of research is found to be poor or incorrect, clients can always go elsewhere. In addition, most ratings are publicly available and therefore open to scrutiny.

There is even an argument that a research house operating a fund-of-funds can’t avoid being accountable, as the success of its fund, and its level of inflows, is dependent on the recommendations made by the analysts.

One fund manager is sympathetic to the challenges faced by researchers: “I think they go in on a best endeavours basis, in a genuine attempt to understand what the organisation is about.

“When a key staff member leaves, and a subtle change occurs in the investment, it can play out quite differently to what anyone expects. That’s not the fault of the researcher.”

Another adds: “Everybody is trying to hold everyone else accountable for everything. They are accountable in a business sense in that they will lose clients.”