Rate the Raters 2012

The results of the first part of Money Management’s annual Rate the Raters survey are in and Lonsec seems to have come out on top yet again, albeit by a smaller margin. Bela Moore and Milana Pokrajac analyse the results.

The Australian investment research industry has seen quite a bit of change over the past 12 months, with Standard and Poor’s (S&P) announcing its departure from the Aussie market, van Eyk Research revamping its strategy and Morningstar changing its rating scale model.

Research houses are under increasing pressure to compete in tough market conditions.

The remuneration model war is still on, with Morningstar, Mercer and van Eyk Research constantly expressing concerns about conflicts of interest apparent elsewhere in the market.

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ASIC, too, is reviewing its position on these conflicts of interest, mostly witnessed in financial relationships between fund managers and research houses. No doubt industry players have done their fair share of lobbying for a desired outcome.

On top of the increased pressure and scrutiny, one of the major players, Standard & Poor’s, has announced earlier this year that it will depart the Australian market in the second half of 2012.

While this might have thrown other players into a client-grabbing frenzy, fresh claims about market saturation have emerged.

But reigning Money Management Rate the Raters champion, Lonsec, has come out on top again – although by a smaller margin than last year – as fund managers rated surprise pocket-rocket Zenith Investment Partners highly as well.

The first part of Money Management’s Rate the Raters survey turns the tables on the industry whose job it is to cast judgement on funds.

Fund managers were invited to rate the six major research houses in Australia: Lonsec, Morningstar, Mercer, S&P, van Eyk Research and Zenith.

While the research gurus still rated highly among fund managers in 2012, ratings houses as a whole were unable to reach the same heights as last year as they came under greater scrutiny from the industry at large.

This year’s survey captured some of the industry’s current focus on governance with varying results bestowed upon ratings houses for ‘transparency’ and ‘feedback’.

Transparency in particular has become an even more important issue in adhering to calls for stronger governance in upcoming regulations.

On transparency, Zenith rated 61 per cent ‘excellent’ with fund managers and 100 per cent combined with the ‘average’ category, Lonsec rated 88 per cent in the ‘average’ and ‘excellent’ categories combined, while S&P also rated well.

Zenith and Mercer topped fund managers’ experience with personnel based on teams’ quality and depth of experience, while Lonsec, S&P and van Eyk Research also received good feedback from respondents.

At the core of what ratings houses do are their research methods, and Zenith and Lonsec topped fund managers’ appraisals with 53 per cent and 40 per cent in the ‘excellent’ categories respectively, while Mercer and van Eyk Research both rated well in the ‘good’ and ‘excellent’ categories.

Raters’ levels of communication and feedback are important aspects of conveying their methodology and processes to fund managers who are eager for greater insights into their products.

A broad spread of results in 2012 saw Lonsec and Zenith clearly impressing fund managers the most.

Too many kids on the block?

There are six major investment research houses currently operating in the Australian market. Even with S&P leaving later this year, Australia remains one of the most crowded research markets in the world.

“There are more research houses here than anywhere else in the world,” said co-head of research at Morningstar, Tim Murphy.

Morningstar operates in Canada, US and South Africa. Murphy believes the main reason for a so-called funds research market saturation in Australia is that this remains one of the last countries where the pay-for-ratings remuneration model is still viewed as acceptable.

“Most of the research house models here are built around a ‘fund manager pays’ model,” he said. “In other markets this just isn’t viewed as acceptable and that’s why these sorts of practices don’t exist.”

From a client’s perspective, however, healthy competition is always a good sign, according to Zenith’s David Wright.

“I know there’s a lot of industry talk about a need for greater consolidation in research and in some ways that’s driven by the research business model (how we generate part of our revenue and so forth), but from a users perspective, I can honestly say, I’ve never spoken to a client or dealer group, adviser who said I wish there was less research,” Wright said.

Although it’s on its way out, S&P Capital IQ is continuing to publish sector reviews of the managers they had been rating.

Head of research fund services Leanne Milton says S&P will leave a gap in the market.

She said with this researcher leaving, Mercer and Morningstar will be the only global researchers in the space.

Meanwhile, the industry is waiting for ASIC to publish its view on what the business model should be and whether the current conflicts of interest have been properly managed.

But Mercer believes the departure of S&P is already a strong enough sign.

“We believe the S&P departure signals that a pay for ratings model may not be viable, as clients seek to avoid conflicts of interest in their own businesses and in those of their suppliers,” the company spokesperson told Money Management.