Five years have passed since ASSIRT rattled the market with news of its pay-to-be-rated scheme. Zilla Efrat revisits the debate and examines what has happened since.
In April 1994, ASSIRT stunned the funds management industry with a plan to charge for its ratings. Its announcement was met with widespread resistance and erupted into a heated debate which dominated headlines for months.
Yet, five years have passed and up to 40 fund managers have since forked out for ratings; even some of the most outspoken critics who swore they never would.
ASSIRT research manager Patrick Bennett confirms that at present about 25
managers pay for his company’s ratings, covering more than 450 of their products. And, he says, there are more coming on board all the time.
While charging fund managers to be rated has not been embraced by the entire industry, it has certainly become a permanent fixture on the landscape.
Five years ago, it was virtually unheard of in Australia or anywhere else in the world. ASSIRT’s move was reportedly based on a belief that the 1993 Pratt Report had sparked the need to do away with rationing of places on a recommended list. Instead, the company said it would place no limit on the amount of managers that received its investment grade rating.
It also promised to introduce a more rigorous process which would generate more thorough research. This would be done by doubling the time spent on research, and moving from one meeting with a fund manager to four. Rather than just talking to fund managers, it would also spend more time reviewing how they worked.
Michael Walsh, who was general manager of research at ASSIRT at the time, says his former company was also aware that fund managers could apply its research to their own advantage.
They could, for example, use it in their advertising campaigns or as an independent audit of their operations, enabling them to compare various areas with industry benchmarks and fix whatever needs fixing.
Despite much fanfare, ASSIRT’s new programme largely fell on disapproving ears. According to Walsh, the debate that followed became, at the times, acrimonious and personal.
The industry rejected the notion of paying to be rated. There was resistance to the idea that managers should fund the attempts of research houses to broaden their distribution base. There was also general concern that other research houses would adopt the same approach.
ASSIRT got tough and delivered an ultimatum to fund managers: be rated now or let it lie.
Its first rating was published in September 1994 and it was not long before other fund managers fell, domino-like, under the spell of peer pressure and commercial need.
Indeed, industry observers note the attraction of being part of ASSIRT’s distribution network and of being included on its investment grade list which is widely distributed among advisers.
Added to this, of course, was the chance to be included in the Asgard master trust, run by ASSIRT’s parent Sealcorp.
Walsh, however, notes that many of the industry’s fears at the time of the debate have never materialised.
One concern was that the ratings process would lack objectivity and be compromised. He says this never happened, as some less glowing ratings have since shown.
According to Bennett, about a quarter of all the products or funds examined by ASSIRT do not get an investment grade rating.
On the other hand, all the fund managers it rates are on its investment grade list.
“This is because our client base consists of the bigger, mainstream fund managers, … the serious players out there. Those that are more dodgy will not use us,” he says.
Another concern at the time was that ASSIRT would dominate the industry, but Walsh says: “We predicted that there would be a number of players doing more thorough ratings. That has happened, even though the way the players charge is different.”
Be that as it may, ASSIRT remains the only player in the market to make fund managers pay for its ratings.
At the time of the debate five years ago, Lonsdale also threatened to follow suit.
It never did, although this is something managing director Andrew Wheeler does not rule out happening in the future.
For the present, however, he says Lonsdale has adopted a user pays principle, which means that the advisers and dealers who use its research cough up.
Van Eyk Research takes a similar stance, again charging advisers for its research.
Likewise, Morningstar, formerly FPG, charges all its users – including advisers and fund managers – a subscription fee for its ratings service. In addition, it charges fund managers a fee for using its star rating conclusions to promote themselves.
Morningstar’s managing director Graham Rich likens this to making them pay a “copyright” fee for his company’s “intellectual property”.
But he adds: “It is not whether you charge fund managers or not. It’s whether an organisation believes in the value of independent ratings and assessments.
“If independence is being valued, it will be viewed by the organisations being rated and the organisations buying the conclusion as being more credible if there are no fees charged to draw a conclusion.”
On what has happened since the debate was first sparked five years ago, Walsh says there is now more diversity in the research industry with several new players on the scene.
He says there is also a lot more choice around in the level of research available, ranging from the more simplistic to the more comprehensive.
“Fund managers can use different levels of resources to get different levels of research. More choice means more competition and I think that we have better research in this industry as a result,” Walsh says.
“The fact that ASSIRT went one way did not mean that the whole industry had to go the same way,” he says.
Other players appear to agree. “We are after different things in the first place.
And, there is place for everyone,” says Van Eyk Research managing director Stephen van Eyk.
He and Rich, it would seem, have nothing to complain about. Both say that their businesses, and market shares, have grown rapidly since ASSIRT first made its announcement five years ago.
