Researchers’ poor report card

Fund managers have used this year’s Money Management Rate the Investment Raters survey to hit out at research houses, with many venting their frustrations over fees, lack of communication and promptness of data delivery.

Of those who participated in the survey, all said they had been rated by Standard & Poor’s (S&P), van Eyk, Mercer, Zenith, Investorweb, Lonsec and Morningstar at some point in the past 12 months.

However, unlike the results of last year’s survey, where researchers were said to be on top of their game, fund managers have not viewed the researchers in an entirely positive light.

In fact, a number of researchers directly bore the brunt of managers’ gripes.

It’s been a relatively calm 12 months for researchers.

The dust has settled between S&P’s deal with Assirt, to the point where the group has already sold off its managed funds data arm to Morningstar.

Fund manager UBS AssetManagement has mended a two-year rift with van Eyk.

Yet despite their time travelling in calmer waters, fund managers’ confidence in the researchers has drifted into stormy seas.

Research methodology

Managers split the field with their responses on how they view research methods used by the raters, with 58 per cent of participants believing the methodologies were good, while 42 per cent said they were average.

The negative response is up on last year’s figure of 38 per cent.

Fund managers were clearly satisfied with Lonsec, with the group scoring 26 per cent excellent and 57 per cent good.

S&P also scored well with 10 per cent excellent, and 76 per cent good.

Managers were also happy with Mercer and Investorweb, with the groups scoring 21 per cent excellent, 42 per cent good and 15 per cent excellent and 40 per cent good, respectively.

Zenith also ranked well with 12 per cent excellent and 59 per cent good.

However, despite fellow heavy-hitters Morningstar and van Eyk also faring well, the experience with the latter prompted one manager to remark: “van Eyk has a confusing and opaque system that is neither consistent nor repeatable.”

Research turnaround times

Yet despite comments like these, the manner in which researchers rate products did not top the list of concerns for managers.

That mantle belonged to research turnaround times, with a staggering 75 per cent of survey participants stating researchers were average at turnaround times when providing ratings.

A further 13 per cent believed turnaround times were good, while the remaining 13 per cent said it was below average.

One manager expressed their frustration with the research houses, stating: “When a research house does full sector reviews, turnaround time can be weeks/months after meeting.”

Another manager said: “Few research [companies] ever meet their advised delivery deadlines.”

Such suggestions may no doubt cause headaches as the results could well be an early indication that in the past 12 months fund manager expectations have grown, though as it stands, research houses look as though they are no longer meeting these expectations.

Transparency

In terms of transparency, researchers fared marginally better.

Fund managers scored the raters 60 per cent for good transparency of the ratings process, and 40 per cent as average.

However, despite managers showing a more positive attitude toward the raters, one fund manager believed the lack of information provided by researchers to advisers is a big issue.

“Advisers put their faith in a researcher’s rating when building client portfolios, but often have little knowledge or understanding of how the researcher determines this rating due to the poor amount of information and transparency involved,” the fund manager said.

Another manager said: “Most have different weightings to different issues which reduces transparency.”

Ability to reflect investment capabilities

Managers also let loose on their views of how well researchers are reflecting the investment capabilities of their business, with 54 per cent surveyed believing the raters’ ability in this area to be average.

The survey found one rater in particular was singled out. Despite rating relatively high in both the excellent and good categories, managers voiced their concerns over van Eyk, with one manager stating: “van Eyk has shown considerable inconsistency in this area.”

Another manager said: “van Eyk is narrow with little capacity to think outside long only.”

While another manager applied their comments to the majority of the group stating: “S&P’s asset class coverage is fantastic, Morningstar’s is poor, van Eyk’s is improving dramatically.”

Though, unfortunately for the research houses, the poor report card doesn’t end here.

Experience

Fund managers also put the experience of research house teams under the microscope, with 55 per cent stating the level of experience of a rater’s team is average.

This result far outweighs the 36 per cent good and 9 per cent excellent result the managers afforded the raters, with close to all of the raters recording an average, below average or poor score.

As a research house team is considered the backbone of a rater’s business, such a lack of reassurance from the managers would surely sit uneasily with many.

Communication

Possibly as a result of the research team’s poor standing among managers, raters again received a harsh blow in terms of their communication skills.

One manager split the big names down the middle: “S&P and van Eyk are clear winners in communication during the ratings process. Lonsec and Morningstar are at the other end.”

Despite a number of managers with a third-party partnership that take on direct communication with research houses, 62 per cent of managers still gave the raters an average rating for communication. The remaining numbers were between 23 per cent excellent and 15 per cent good.

Conflicts of interest

The survey also found that managers are concerned about raters’ conflict of interest in terms of platforms, ownership and offering investment management products.

A total of 50 per cent of respondents believe raters that operate platforms have a conflict of interest, while 43 per cent said no, and 7 per cent were unsure.

“Increasingly the platform analyst is the vital link. Anything above ‘investment grade’ from a research house lets you get to the platform analyst, who is the real gatekeeper these days,” one manager said.

While another manager said: “[Being a] platform provider is strongly influential if they support a rating by positive inclusion on their own platform, or if used in their consulting business.”

In terms of a rater providing implemented consulting, 54 per cent believed it was a conflict of interest, while 39 per cent didn’t agree and 7 per cent were not sure.

However, managers were more certain that offering model portfolios was not a conflict, according to 54 per cent of participants.

The survey found managers were close to unanimous in their response as to whether a rater was conflicted by offering investment management products, with 89 per cent scoring in the affirmative.

A small number (7 per cent) believed such an offering was not a conflict and 4 per cent said they were unsure either way.

However, when it came to whether it was a conflict of interest for a rater to be owned by a fund manager or other institution, the response was a resounding 75 per cent yes.

One manager said: “Conflict given ‘Chinese walls’ between research and use on own platform. Model portfolio as yet unknown given discretionary nature typically of $$ flows into model, that is, researcher can control the manager selection, but the dealers still have to ‘influence’ for use of models.

“Researchers are quick to criticise, but are quick to cover their own flaws and conflicts,” another manager said.

Another manager said charging fees for ratings “must result in conflicts of interest”.

However, until there is an alternative to research houses rating manager products, ultimately the raters hold all the cards.

Fees for ratings

The survey also revealed that 54 per cent of participants admitted to paying a fee to have their products rated, with 46 per cent stating they have not parted with money to have their product rated.

However, 68 per cent said they believed payment for a rating might compromise the rating.

Interestingly, managers were divided as to whether they believed they should have to pay fees to be rated, with 50 per cent claiming managers should pay and 50 per cent disagreeing with the practice.

Sixty eight per cent of managers strongly believed they should not have to pay for their products to be rated to use a rating as part of their marketing, with 32 per cent believing they should have to pay.

Influence

Yet despite delivering the research houses continuous blows, the survey found fund managers still believe the work of the research houses is very valuable, particularly to them.

The survey found 73 per cent of participants believe research house ratings have some influence, while 27 per cent believe it has strong influence.

Managers have also ranked the researchers as having a strong influence in terms of influence of inflows and outflows, with 56 per cent admitting researchers have strong influence, 38 per cent some influence and 6 per cent no influence.

Researcher van Eyk topped the field with 61 per cent strong influence, 28 per cent some influence and 11 per cent no influence.

S&P rated well with 24 per cent of managers saying the group has strong influence, and 76 per cent some influence.

Lonsec recorded 58 per cent strong influence, 37 per cent some influence and 5 per cent no influence.

Mercer ranked well with 41 per cent strong influence, 53 per cent some influence and 6 per cent no influence.

Managers rated Morningstar as 13 per cent strong influence, 67 per cent some influence and 20 per cent no influence.

Investorweb rated 20 per cent strong influence, 50 per cent some influence and 30 per cent no influence.

Zenith scored 13 per cent strong influence, 47 per cent some influence and 40 per cent no influence.

These results will no doubt come across as mixed messages for the research houses, with managers adamant there are issues they are not happy with, though still considering the raters influential.