Ratings house recommendation should not be viewed in isolation

The general manager of the Future Fund, Paul Costello, has provided an insight into the fund's use of ratings houses, pointing out that their advice and analysis should not be utilised in isolation from internal assessments.

Giving evidence before the Senate Committee on Finance and Administration, Costello said the Future Fund utilised external investment managers who, in turn, utilised ratings houses but said that their recommendations were not viewed in isolation.

"The role of our organisation is to think about the structure of the portfolio, to design the types of exposures we want, and to shape the guidelines that we give to external investment managers, and those investment managers themselves do the actual selection of the security," he told the committee.

"They (the investment managers) of course have reference to those ratings agencies' guidelines," Costello said. "I think many of them would say that securities deserve much deeper analysis at fund manager level rather than relying on those guidelines. We do tend to use them a little in terms of setting general guidelines for our managers, but I think it is now well acknowledged that relying just on ratings agencies' guidelines without doing further work has left many investors in a situation that they did not expect to be in."

He said while the Future Fund still found the ratings agencies useful, it believed "diligent work alongside that is the best model".