What causes mid-cycle review of the fund rating?

The key things that commonly trigger a mid-cycle review of a fund’s rating are usually associated with the movement of key people at the fund manager or any significant movement within the client base, according to Rob da Silva from SQM Research.

da Silva, who has been SQM’s head of research for the last five years, told Money Management that a slightly worse fund performance was very rarely looked at as a reason to undertake an additional, mid-cycle review, instead he would take a closer look at the changes in roles of the key people and any sudden movements within the clients’ base.

“With people it comes mostly to one or more key investment staff that have left and are no longer with the firm, or their roles have changed dramatically, and if they have been an important part of the process, and they no longer there, then that’s obviously a meaningful event that can impact the fund fairly dramatically,” he said.

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“But we don’t normally do a mid-cycle review because the fund’s performance has been bad for the last three or four months unless, for some reason, the fund was down 70% to 80% and the market wasn’t down that much.”

The second thing that might lead to a mid-cycle rating revision or putting the rating on hold would be any significant movement among top clients. According to SQM’s head of research, this would particularly hold true in case of slightly smaller fund managers, such as new or boutique or specialist fund managers, which had a fair bit of concentration in their client base.

“If for whatever reason a lot of clients leave at a similar time then that can be a problem for a business. So, if two or three of your top clients leave and pull their money out, in a short space of time, that can be a problem that we will need to look at,” da Silva added.

At the same time, in either of those scenarios, the approach should focus on assessing first how serious the situation was, what the ultimate impact might be and what the managers were doing about it.

“There may be a lot of things that manager can do to rectify the situation, so we try to take the approach of ‘let’s not shoot first and ask questions later’ – but let’s put everything on hold and speak with a manager or who else is relevant and get an understanding what’s actually going on.”

Da Silva, who did not comment on any particular funds and ratings, said that overall mid-cycle reviews and other similar events were not that common and would take place a few times a year on average.

In case of SQM Research, the rating might be put on hold from a few days to up to four weeks or longer to allow the research house enough time to better understand how the fund manager is handling the situation.

“Sometimes we would reinstate the rating or say that this rating still holds, other times we would renew the rating process, even though we might come up with the new rating which might be still the same,” da Silva said.

Last week, SQM Research announced it had placed two Pengana international fund ratings on hold following the departure of two senior investment staff members.

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