Research houses answer the critics
The recentMoney Management Rating the Raters Surveyhighlighted a number of key concerns that funds management groups have about the business methods, processes and capabilities of research houses.
Chief among the concerns were issues relating to fees and remuneration models and what this meant in terms of supplying research and other services. At the same time there was also concerns over the expertise of research houses to provide insight into the operations of fund management groups.
And it is these concerns that have in turn caught the attention of the research houses, which are keen to outline why they operate in this manner, despite the protestations of those that use their services.
Assirt associate director Anthony Serhan says each research house, regardless of its style and business model, is a commercial enterprise and that fees charged for funds ratings are part of an overall revenue stream.
“People have an in-built impression that an up-front fee model, as used by Assirt, biases our ratings process, but we are not seeing the same thing applied to other groups that exercise the same model, such as Standard & Poors or Moody’s,” Serhan says.
The latter groups have been using an up-front fee model since the early 1970s, after finding their subscription-based models were failing to bring in adequate revenue to cover the volume of work involved in those groups providing ratings.
“These are not big dollars that we bring in for charging for research. Much more comes from the onselling of that research to other clients. Despite this, critics are quick to comment on the fee models in use and there have been few suggestions as to alternative models, such as charging advisers for research,” Serhan says.
He says there has been an increase in the players in the research industry and each of them has brought some form of fees or charging to the table.
Van Eyk Research head Stephen van Eyk says the addition of new players has occurred in a static market and offshore players will find it difficult to move into the local market with a charge and rate model.
“Australia is a small market and overseas players cannot come into the market with that model. There is no growth left in that side of the market, so the option is to charge for other parts of research, including the onselling of that information,” van Eyk says.
He also denies that although many respondents felt research groups use research to leverage into other parts of the business, there is nothing wrong with this approach.
“Research houses are not crooks. Van Eyk has never gone to any group and said give us other business and you will get a positive rating,” van Eyk says.
“We do not feel our competitors have a conflict of interest either and we know of no-one that gives positive ratings for a fee. The focus is on clients and providing good service that is most useable for them.”
Morningstar head of research Daisy Chee says even though Morningstar came out reasonably well in the survey, its business model may have garnered negative responses in the survey.
Chee says this is because Morningstar does not charge fund managers for rating them. In fact, the group charges for ratings to be published regardless of whether they are one or five star ratings.
“As a result of our business model, Morningstar will have more poorly rated fund managers than other research houses and for this reason alone, we will tend to have fewer favourable votes from fund managers than our competitors. In spite of this, we came out rather well in the survey.”
Serhan says the impression research houses may have in the minds of managers is linked to how they viewed their last rating experience.
“Managers are sensitive to the impacts from their last rating and the manner and processes used and what they have gone through, and are influenced by that experience,” Serhan says.
Van Eyk says the survey has acted as a clarion call for the group, which felt that the issue of transparency was one of concern.
“On one hand, the quantitative side is transparent but the qualitative is by nature subjective and based in part on analysts’ opinions and cannot be as transparent as the quant side,” van Eyk says.
“We can expand the categories this data is analysed in, but at the end of the day, it is a judgement call. Maybe we can be clearer on what those judgements are based.”
Serhan defends the skills involved in managed funds research and says it is unfair for fund managers to criticise the processes and people involved in research.
“The business of managing funds and the rating of funds are different, including the range of skill sets applied. Our analysts are capable of drawing out insights the managers have not seen. This was evidenced when a majority of respondents in the survey said research provided those insights for their own business and their competitors,” Serhan says.
“At the same time, it is not an individual effort as there are processes and structures in place that dictate how we rate a manager, and in this regard, there would be similar processes in place in terms of what goes on with fund managers.”
Chee felt the survey provided some insights into the research house and fund manager relationship. However, despite feeling that Morningstar came out of the report fairly well, Chee questioned whether fund managers should be commenting on research houses at all.
“I question if fund managers are the appropriate people to be the judges of research houses, given that they are likely to rate a research house poorly if the latter places a low rating on them. There are inherent biases if fund managers are the judges,” Chee says.
“I think the appropriate judges are the financial planning dealer groups and investors, given that they are the clients and without their support, the research houses and fund managers will not exist.”
Serhan says the overall aim of funds management research is not to provide a rating against peers but rather against a benchmark.
“Regardless of when a research house rates, they seek to assess the capacity to deliver to the process and promise as outlined by the manager. If this research reflects this and any shifts that may have occurred, then I think there should not be a problem.”
AUTHOR
Jason Spits
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