confidential report shows many fund providers question independence of company
A confidential report from Standard & Poor's shows while intermediaries are largely positive about the ratings service, some question its independence.
They also find it hard to understand S&P's decision-making on fund ratings, in particular the difference between A, AA and AAA status.
The document, obtained by Investment Week, contains notes from interviews with advisers and fund providers. It refers frequently to Forsyth/Old Broad Street Research, a rival ratings agency, which a number of those interviewed see as S&P's main competitor. FT Fund Ratings, one fund group concludes, is likely to fail, although Morningstar is seen as a greater threat.
The report was compiled from notes taken at a series of meetings in the first half of 2002 between an S&P interviewer, 13 intermediary groups and 13 fund providers. S&P invited groups to say what is both good and bad about its service in an bid to understand how best to improve it.
It names individuals from fund groups such as Invesco Perpetual, Fidelity, Aberdeen, JP Morgan Fleming, Jupiter, New Star, Lombard Odier and Lazards, as well as brokers such as Hargreaves Lansdown, Chase de Vere, NatWest Insurance and Bradford & Bingley.
For the most part, advisers, who receive the fund ratings service for free, remain supportive and praise S&P as a good source of research and, in several cases, a useful compliance tool. Fund providers, which pay to have their entire fund ranges rated, are more critical both on cost and the quality of the analysis S&P offers.
The main criticism from brokers is their perception that because S&P is paid by fund providers, it lacks independence.
S&P has always defended its business model, under which revenue is generated from fund providers. However, the report notes of one IFA: 'He doesn't see us as independent as we never say anything bad about anyone and the groups pay for the ratings.'
On the other hand, all intermediaries praise S&P's policy of not letting fund providers select which funds they want rated. For other positive points on the service, see box below.
When asked how S&P could improve its service, key recommendations from intermediaries were that S&P should track style drift and provide evidence of how well rated funds had performed.
The largely supportive position of IFAs is contrasted by the comments attributed to fund providers, many of which expressed concerns over the cost of the service, which rose dramatically last year, and the quality of S&P's analysts.
Many of the groups, which often have disputes over the ratings S&P gives their funds, suggest the quality of fund analysis has deteriorated. Of the 13 groups, five are critical of S&P's analysis of funds, while four believe it is generally good.
Of the remaining groups, one did not comment on the quality of analysis, while the others had more minor concerns.
One leading fund group is reported to have said: 'The quality of S&P's analysts has improved but there is still a long way to go. Some of them are great. Others lack preparation and skill.'
The report, which notes that 'we [S&P] have problems hiring analysts,' does, however, contain a number of positive responses from fund groups on the quality of the group's analysts.
After two and a half years of slumping markets, fund groups have questioned how cost effective the service is to them in marketing terms. One large unit trust group claimed it wanted to continue supporting S&P but felt its marketing budget 'can no longer sustain it'. Another said it would seek to put pressure on S&P to drop its charges.
Paul Barnes, product development director at S&P Fund Services, said: 'We are taking this research deliberately to give ever increasing services to our users. With the exception of revealing how managers are incentivised, we are moving on all the other points raised.'
As of the first week in October, S&P is planning a 30-page guide to its ratings, including Micropal and Fund Research. This will spell out the methodology behind its ratings services, the funding model and information on its analyst quality and resource.
For further details on S&P's plans see key points below.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till