Transparency a window into research houses

The research process employed by ratings houses is becoming increasingly transparent, though it continues to remain subjective, according to the fund managers surveyed in this year’sMoneyManagementRating the Raters survey.

Though the survey shows that a high percentage of fund managers still consider research houses to be only ‘somewhat transparent’, it appears a number of individual houses have become more transparent since last year’s survey.

Van Eyk Researchhad the biggest jump in the percentage of fund managers that thought it was ‘totally transparent’, up from five per cent last year to 47 per cent this year.

While not one fund manager thoughtLonsdalewas ‘totally transparent’ last year, 20 per cent did this year, whileAssirtincreased its percentage in this category from six per cent to 26.7 per cent.

InvestorWebwas heavily weighted towards the ‘somewhat transparent’ category at 73.3 per cent of managers, and was also the lowest in the ‘totally transparent’ category at 6.7 per cent.

Though the broader trend was towards more transparency,Morningstardropped from having 57 per cent of managers think it was ‘totally transparent’ last year to 33.3 per cent this year.

Newcomer 5Di had the highest response by managers in the ‘not at all transparent’ category of the survey, at 23.5 per cent.

Though generally increasing in transparency, the survey showed fund management groups surveyed believed that the ratings provided by the research houses are still subjective.

This was indicated by the higher percentage of managers electing to label houses ‘somewhat subjective’, with Assirt at around 93 per cent, Lonsdale at 80 per cent, and Morningstar and InvestorWeb at just over 73 per cent each.

Morningstar and InvestorWeb were perceived as the most subjective with almost 27 per cent of respondents saying the groups were ‘highly subjective’.

Investment Research Solutions director Angela Ashton, who specialises in tailoring ratings given by research houses for financial planning dealer groups, says this subjectivity is just a reality of the process.

“There has to be some interpretation made. At some point somebody has to make a decision,” she says.

According to Ashton, researchers are subjective as they even need to employ qualitative skills to interpret the quantitative data they receive, and she says there are “no blanket rules”.

The greatest change in subjectivity ratings was van Eyk Research, which though recording the greatest subjectivity last year had the highest percentage of managers thinking it was ‘totally objective’ this year at 23.5 per cent.

The survey also shows most fund managers want qualitative rather than quantitative data to make the greatest component of the research mix. There was a preference for a 75/25 or 60/40 qualitative/quantitative mix, with each being preferred by just over 26 per cent of managers.

The 40/60, 90/10 and 33/66 qualitative/quantitative mixes received under 16 per cent of managers’ support in total.

According to Ashton, there is no right or wrong mix of research components, as the whole process of research is “an art, not a science”.

She says it is important both components are used, as either qualitative or quantitative research by itself does not say much, and though she says research houses sometimes use a shade too much qualitative data, she can understand the fund managers’ preference for this component of research.

Ashton says a focus on the short-term performance of fund managers should be eradicated, but that it is still out there to an extent in the market. It is a view shared by fund managers with almost 79 per cent saying performance should only be regarded as somewhat important, and only over the longer term.

One fund manager said “research is far too rear-view centred — they have a habit of being slow to react and just pick last year’s winners”.

Ashton says one major flaw of research houses within the industry is that they do not foster the research process internally or place enough value on what researchers can do. Instead, they see their product as a cost centre while focusing on corporate outcomes, asking themselves how many fund managers can be rated, and for what cost, as opposed to improving the quality of decisions.

She says that though it is not always the case, there is also often a fear of alienating fund managers when delivering ratings that affect the final results.

The Rating the Raters survey shows that sector reviews, rating an equity sector covering all managers, is preferred by over 89 per cent of managers as opposed to a manager review, covering only a particular manager. This reaffirmed the opinion given in last year’s survey, when 70 per cent of managers came down on the side of sector reviews over manager reviews.

Ashton says that the sector review is by far the best methodology for assessing managers, saying it is hard to compare different managers with only manager reviews.

According to Ashton, another flaw in the industry is that research houses are failing to provide dealer groups with tailored results and customisation that could increase the value of the product they provide.

“The industry is better off with research houses. But the reason why I have a market is because in many ways, researchers are producing one-size-fits-all type of work,” she says.

Some respondents to the survey also believe research houses need to examine themselves as closely as they examine fund managers. One fund manager said that “as all research groups are gatekeepers to the industry, an audit or rating of their process, business strength and performance would be appropriate”.