SQM Research gets recognition from fund managers

rate the raters sqm research FundSource lonsec Zenith mercer morningstar

17 June 2019
| By Oksana Patron |
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The first part of Money Management’s 2019 Rate the Raters, which gauges fund managers’ sentiment toward the research houses that rate their products, has proven that recent changes across the financial services industry and the new post-Royal Commission environment have not spared the ratings sector, with traditional big players being gradually forced to give more space to smaller and new players.

While some of the most established research houses chose to venture out and shop overseas to facilitate their expansion to offshore markets, with Zenith announcing the acquisition of New Zealand’s leading research business, FundSource in May, smaller players like SQM Research continued to focus on growing their presence and awareness among local fund managers. As a result, the firm managed to earn one of the highest ratings this year across three categories out of six.

Fund managers appreciated SQM, which originally started as a property data business, for its senior staff with “the expertise to ask the right questions” and the ability to structure comprehensive reports, in contrast to some larger players which continued to hire junior or graduate analysts and allowed them to look after the research side of their business.

However, the results from this year’s survey have painted a quite different overall picture compared to previous years, as managers tended to articulate the individual strengths and weaknesses of each of the research houses rather than focusing on choosing winners and losers.

Fund managers who responded to Money Management’s survey this year reiterated their earlier concerns, which traditionally revolved around high staff turnover at research houses coupled with staff replacements by junior representatives with significantly less experience, as well as the growing significance of ratings in a new and more fragmented market environment.

At the same time, the research houses continued to be seen by managers as biased, as they often favoured the bigger household names and, in a few cases, it was reported that new strategies were put in the closest category instead of being paired with funds with similar objectives.


The results from the 2019 survey confirmed that not much has changed since last year and Lonsec and Zenith remained the most frequently used research houses, according to the fund managers who participated in the study.
Some 86 and 84 per cent of respondents said they had received ratings from Lonsec and Zenith respectively.

The data pulled from the survey also confirmed that Morningstar was the third most popular research house among interviewees, with 71 per cent revealing that they had their products rated by the firm.

At the same time, both Mercer and SQM Research saw a somewhat smaller proportion of managers who shared their opinions with Money Management turning to them, with only just over half of them having declared they had ratings from these two assigned to its products in recent months.


When it came to evaluating the research methodology applied by each of the raters, managers stressed that it was the consistency and application of methodology that mattered most to them. Also, according to some fund managers, the research houses should stay more focused on the Australian landscape when developing and improving their research methodology instead of “importing” models that they use in overseas markets.

Having said that, the survey found that Lonsec, one of the most established research houses, suffered a downgrade in the eyes of fund managers who participated in the study.
Although the firm continued to attract a high proportion of either “excellent” or “good” ratings across this category, with 87.5 per cent of managers describing its methodology in that way, it landed in second position.

This means that Mercer jumped back to the top spot as the firm managed to attract a slightly higher number of respondents (89.3 per cent) who gave it a combined “excellent” and “good” rating. By comparison, Mercer won this category in 2016 by scoring the highest combined rating from 79 per cent of respondents. In the following years it was pushed down to the third spot, by Lonsec and Zenith.

Following this, the methodology of SQM Research has been awarded with either “excellent” or “good” rating by 82.4 per cent of the fund managers who rated the firm in the survey, while Zenith was pushed down to the fourth spot this year due to a lower proportion of respondents rating the firm’s research methodology as either “good” or “excellent” (76.6 per cent).

Additionally, Morningstar, which came fourth in this category last year, slipped further down and saw around 71 per cent of respondents depicting its methodology as above average.


This was the only category in which Lonsec emerged as a winner this year, with 42.6 per cent of respondents saying they were highly satisfied with a rating given out by the research house and describing it as “excellent”.

The traditional winner of this category, SQM Research, dropped to second position with only 37 per cent of fund managers participating in the study describing their level of satisfaction from ratings the company granted to their products as “excellent”. 

In comparison, in 2018 and 2017 the firm scored the highest number of “excellent” ratings while in 2016 it came in closely behind winner Mercer.

Things have changed for Mercer this year too, and the company saw only 32 percent of respondents rate it as “excellent” when measuring how they felt about its ratings.

Zenith, on the other hand, was rated slightly higher in this category and landed one spot above Mercer, thanks to 34 per cent of respondents granting the Melbourne-based firm the “excellent” rating.

Morningstar saw the lowest proportion of respondents who rewarded it with the “excellent” rating, with less than one third of fund managers participating in the survey describing their ratings from the company as such.

Additionally, fund managers said that, in a few cases, research houses provided very little feedback on how they could improve their ratings and they were not always engaged in discussions over the overall outcome. 

On top of that, managers also reported cases where research houses delegated this task to their graduate analysts who had no experience through market cycles or took a negative view on the sector as a whole, which impacted the ratings for the individual funds.


As far as the transparency category was concerned, respondents seemed to be divided between Lonsec and the much smaller SQM Research and could not deliver a clear picture on which research house offered, according to them, the most comparable levels of transparency of their ratings process.

The two companies attracted a similar proportion of combined “excellent” and “good” ratings from fund managers, with over 83 per cent of them assigning such a rating with regards to their transparency. 

Close to 84 per cent (83.9 per cent) of fund managers who rated SQM’s transparency of the rating process assigned the firm either an “excellent” or “good” rating. At the same time, Lonsec snapped at SQM’s heels and scored a combined “excellent” and “good” rating from 83.3 per cent of respondents.

However, in the absolute terms, it was Lonsec that scored the highest proportion of single “excellent” ratings, the survey found.

Zenith came third with a slightly lower proportion of combined “excellent” and “good” ratings as close to 74 per cent of the fund managers who shared their opinions with

Money Management this year decided to reward Zenith with the highest combined rating.

Following this, less than two thirds of respondents (60.7 per cent) granted Mercer with the highest ratings across this category while Morningstar managed to attract the above average ratings from a bit more than half of respondents (55 per cent). 

The key take-away here for research houses was a need to provide fund managers with more constructive feedback and to become more responsive regarding the queries they had in the ratings process.


This category was no different from the previous editions when fund managers flagged several issues.

Although the level of experience and the quality of personnel continued to vary between the research houses, respondents confirmed a trend that indicated that raters continued to take on more junior staff with often limited knowledge around market cycles and/or fund management businesses and, most of all, with no practical experience in managing clients’ money. 

However, senior staff did not always guarantee the objective outcome either as there were a number of experienced professionals who exposed a pre-set bias, a few fund managers noted.

On top of that, some respondents were concerned with a high turnover among employees working for the research houses and this was reflected in their ratings regarding personnel quality.

All in all, this year fund managers decided that Zenith’s staff represented the highest quality, with close to 70 per cent of respondents having rated its staff quality as above average.

Last year’s winner, SQM Research, was pushed down to the second spot with close to 65 per cent of respondents awarding it the highest rating, followed by Mercer which saw 63 per cent of respondents rate the quality and experience of its staff as “above average” despite a drop from second position last year to the third place this year.

Following this, only 52 per cent of fund managers who rated Lonsec’s staff in the survey decided to describe the quality of its staff as “above average”, while just 42.5 of respondents were of the view that the quality of Morningstar’s personnel was above the average. 


The survey found that, going forward, research houses will need to improve several things, including their ability to provide managers with more constructive feedback which will consequently help them move forward the rating in the future. According to the survey, the raters will also need to expose greater willingness to be challenged on views and outcomes.

When it came to the results, fund managers decided again in favour of SQM Research, whose feedback was voted the most valuable and supported by 61 per cent of respondents who described it as “excellent”.

This was in line with last year’s results which saw a similar proportion of managers who participated in the survey (60 per cent) reward the firm with an “above average” rating.

At the same time, 60.4 per cent of fund managers who shared their opinion with Money Management rated Lonsec’s feedback as “above average”.

Interestingly, Zenith, which came third, saw its general feedback rated as above average by a significantly lower number of respondents compared to SQM and Lonsec.

According to the survey, only 42.6 per cent of all the received answers described its feedback as higher than average. 

Following this, both Mercer and Morningstar saw less than 30 per cent of all respondents, 29.6 per cent and close to 22 per cent respectively, give positive answers, indicating that a significantly smaller proportion of fund managers viewed their general feedback as above average.


Money Management this year again asked fund managers 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 the survey clearly indicated that SQM Research emerged as the strongest research house across this category. According to the study, 90 per cent of fund managers who rated SQM agreed that the firm chose the most accurate representation of the peer group.

Following this, close to 82 per cent of respondents noted that Lonsec also did quite a good job and selected an accurate representation of the peer group, compared to only 74.5 per cent of respondents who were of a similar opinion with regards to Zenith.

Furthermore, 72.1 per cent of the funds managers who took part in Rate the Raters survey said the same thing about Morningstar, and only 70 per cent felt that the peer group and/or sector selected by Mercer was the most appropriate one.  

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