Has COVID-19 impacted the relationship between fund managers and research houses?
Fund managers have continued to see research houses as a fundamental part of the industry and viewed their services as of high quality despite the difficulties created by the COVID-19 pandemic and the partial lockdown of global businesses around the world, according to the findings of the first stage of Money Management’s 2020 'Rate the Raters’ survey.
The survey aims to gauge fund manager sentiment towards the main research houses.
Although the majority of fund managers who participated in the study this year said recent events had a very limited impact on their relationships with the raters and the way the business operated, other than a stronger reliance on technology and the introduction of online interaction, some flagged a number of new disruptions.
This included more requests for their data, the impact of international travel restrictions on meeting their offshore-based portfolio managers and, in some cases, holding back ratings of new products or making it more difficult for managers to launch a new global capability into the Australian market.
A few fund managers pointed to growing conflicts of interest as research providers were aspiring to become asset managers and, additionally, some research houses also distributed their own asset management products or were engaging in paid sponsorships, such as conferences, from fund managers.
SO, WHAT’S NEW?
This year’s study has again delivered a mixed picture from fund managers as they were split in their opinions between Zenith, SQM Research, and Lonsec.
The fast-growing North Sydney-based research house led by Louis Christopher, SQM Research, has continued its upward trend and was recognised by fund managers who appreciated its dominant position across four categories: transparency of research process, staff quality, feedback, and rating satisfaction.
Additionally, SQM was praised for its expertise in fixed income and credit products, its depth and data-driven approach, as well as a thorough understanding of the mortgage and property industry.
Zenith, which announced and then aborted the acquisition of superannuation-focused ratings house Chant West in February, came second and managed to attract the highest ratings for its research methodology. According to fund managers participating in this year’s study, Zenith saw the highest number of fund managers who said their products had been rated by this research house.
A revamp of the research team at the end of last year and the company’s recently launched new approach to environmental, social and governance (ESG) factors saw Lonsec being voted a winner by fund managers in that category as respondents decided that Lonsec’s selection of peer groups and sectors was the most accurate among all raters.
The results once again confirmed that the two traditionally biggest research houses, Zenith and Lonsec, registered the highest numbers of managers, of those participating in the study, who admitted that their products had been rated by these two firms. Approximately 68% of respondents said that they had their products rated by Zenith while 66% said that their products were evaluated by Lonsec, respectively.
Following this, there was also no surprise when it came to the third spot which traditionally belonged to Morningstar, although a slightly lower number of fund managers participating in the study (56%) said this year that their products were rated by this firm.
Almost half of respondents (48%) said that they had their products reviewed by SQM and 40% said the same thing about Mercer.
Fund managers said that when it came to the research methodology that rating houses applied to their products, they expected the rating agencies to demonstrate a level of expertise relative to each of the asset classes, and to spend more time to understand a manager’s process and help fund managers navigate through the requirements.
According to the managers, the winner in this category was Zenith as it managed to attract the highest proportion of either ‘excellent’ or ‘good’ ratings for its research methodology. The Melbourne-based firm, which also scored the highest number of the best ratings in absolute terms, was praised for “investing more time mid-cycle to meet with the fund managers and have portfolios updates”.
This category’s traditional winner, Lonsec, was rewarded the highest combined rating from only 79% of fund managers in this year’s survey, compared to 87.5% last year, which saw the research house being pushed down to the third spot and overtaken by SQM Research which managed to attract combined ‘excellent’ and ‘good’ ratings from 86% of those fund managers who rated it.
At the same time, 78% of fund managers rewarded last year’s winner Mercer’s methodology with a combined rating of either ‘excellent’ or ‘good’, which placed Mercer in fourth place, after Lonsec.
Morningstar earned the highest ratings in this category from 61% of fund managers, which represented a significant growth from last year when only 42% of respondents described its research methodology as either ‘excellent’ or ‘good’.
SQM Research was the clear winner in this category in the eyes of fund managers, with close to half (47%) of all respondents describing their level of satisfaction with a rating given by this research house as ‘excellent’. SQM was also the only research house in the category which did not earn any ‘poor’ ratings.
The firm was highly rated by managers due its “thorough and professional process”, with one fund manager saying the rating their fund had received “genuinely reflected” the fund’s value and the fund was granted the rating “it deserved”.
Last year’s winner, Lonsec, which in 2019 saw 43% of respondents saying they were highly satisfied with a rating given by the company. However, this year only saw 37%, relegating it to third place.
Zenith managed to record a small climb from the third spot last year to second position this year thanks to 39% of fund managers who described their level of satisfaction with Zenith’s rating as ‘excellent’.
Mercer and Morningstar were the two research houses with the bottom numbers of fund managers who were satisfied with their ratings, with only 29% and 19%, respectively, giving out their top ratings to those two research houses. Additionally, Morningstar saw a quarter of managers who described their level of satisfaction with a rating granted by the firm to their products as ‘poor’.
As far as the transparency of the rating process was concerned, fund managers pointed out a number of things that affected how they rated each of the research houses. First of all, there was a clear bias among the rating agencies with regards to particular styles or processes. Also, a few respondents expressed a degree of disappointment with the amount of time being dedicated by research houses to each of their products, saying that quite often multiple products were being rated during the same meeting.
This meant the time spent in total per product was significantly lower than what it would have been had the products been rated separately.
Having said that, SQM Research came out as the winner with almost 90% of those fund managers who shared their views with Money Management having given it the highest combined ratings and evaluated SQM’s transparency as either ‘excellent’ or ‘good’.
By comparison, last year respondents seemed to be divided between Lonsec and SQM with the two companies attracting a similar proportion of combined ‘excellent’ and ‘good’ ratings (83%).
However, this year Lonsec was pushed down to the third spot as only 72% of respondents assessed the firm’s transparency as either ‘excellent’ or ‘good’.
At the same time, Zenith advanced to second place after having attracted either ‘excellent’ or ‘good’ ratings from 83% of respondents, compared to only 74% last year.
Similar to the previous years, fund managers raised a number of issues when they were asked to gauge the level of quality and experience of the rating houses’ personnel, with the general consensus being that only those analysts who had previous experience in managing money had the right degree of understanding the fund managers’ products. At the same time, managers complained that there was still quite a number of less-experienced analysts and the gaps in their knowledge were often exposed when interacting with the fund managers.
Despite this, SQM Research managed to make a comeback to the top spot, after it was pushed down last year to second position by Zenith. The quality of a relatively smaller research house and its staff was rated by almost 80% of respondents as ‘above average’.
Managers praised SQM’s head of manager research, Rob da Silva, for his high level of competence and in particular his expertise in fixed income.
Zenith came second this year with only 66% of managers who assigned their highest ratings with regards to the quality of the company’s staff, compared to 70% last year.
What is more, Mercer, which saw 63% of respondents who said they were happy with the level of service provided by its staff last year, kept its third spot. However, the company saw a slight drop in ratings as only 55% of fund managers said this year that the staff was ‘above average’.
At the same time, Lonsec, which suffered from significant staff turnover, ended up in fourth place with only 48% of managers rating the quality of this research house staff as ‘above average’. The company also saw the highest proportion of managers (11%) who were highly dissatisfied with the level of competency of Lonsec’s staff and assigned it a ‘below average’ rating.
Although Morningstar was praised this year for “investing in experience” of its staff the firm managed to attract the lowest proportion of managers (47%) who gave it the highest ratings across this category.
Feedback from the research houses was, in general, viewed by fund managers as “good to get” and “always appreciated”.
Some managers even admitted that they had worked hard and were very specific to source this feedback from research houses and that it was even more difficult to receive feedback from those rating houses which did not charge for their ratings, one manager said.
Fund managers once again decided that the most satisfying feedback was received from SQM Research, with 65% of respondents describing SQM’s feedback as ‘above average’. By comparison, last year 61% of managers participating in the survey voted for SQM and assessed the firm’s feedback as the most valuable.
Zenith managed to overtake Lonsec as the firm recorded a substantial jump from 42% of managers who described its feedback as higher than average last year to 60% of those who were of a similar view this year.
Lonsec, which dropped to third position this year saw only half of respondents having rated its feedback as ‘above average’.
According to the survey, both Mercer and Morningstar attracted less than 30% of managers who chose to describe the quality of their personnel as ‘above average’ at 29.7% and 21%, respectively.
When asked to rate the accuracy of peer groups and sectors selected by individual research houses which evaluate the performance of their funds, the data collected from fund managers through the survey revealed that Lonsec emerged this year as the strongest player in this category at 92% of managers.
According to further data, Lonsec was closely followed by Zenith which according to 91% of fund managers participating in the survey has also selected an adequate representation of the peer group for their products.
Last year’s winner SQM Research dropped to third spot this year with 88% of fund managers being satisfied with the firm’s selection of the peer group compared to 90% of fund managers who were of this view a year before.
On the other hand, Morningstar which came last this year with only 63% of respondents being positive about its peer group selection, compared to 72.1%
Mercer’s peer groups choice satisfied 77% of managers as some described its approach as “hard to understand” by one fund manager, who found the’s firm comparison between active and passive managers as “creating strange outcomes”.