As all unit trust sales directors know, Standard & Poor's Fund Research ratings sell funds, but just...
As all unit trust sales directors know, Standard & Poor's Fund Research ratings sell funds, but just how reliable is the service?
In the eyes of a number of fund groups, the answer appears to be: not reliable enough. Several of the largest asset managers are among those looking to back a rival set of qualitative ratings being put together by Forsyth Partners and Old Broad Street. To an extent, this is a move to pressure S&P on price. With its near monopoly position in the market, it is able to charge near to monopoly prices, in the eyes of fund managers. But it also reflects what they feel is the gap between the quality S&P offers in principle and what turns up in practice.
The Forsyth offering is certainly cheaper than S&P but whether it is higher quality remains to be seen. It is offering to update ratings every quarter, which looks like an improvement on S&P's annual rejig. The big question remains: will Forsyth have the capacity and resources to deliver on this promise?
The key to Forsyth's success is whether or not intermediaries take the new ratings to their hearts. Whatever S&P's faults, Fund Research ratings are deeply embedded in the fund-picking process. For instance, Chase de Vere has long recommended funds only if they are Fund Research-rated.
Others have launched ratings services, such as Micropal, Morning Star and Lipper Leaders. They might well appear in adverts but have never succeeded in permeating the broader intermediary market. For Forsyth to succeed, it is going to have to be a long-term venture.
Fund Research has such a huge following because it offers a means of outsourcing fund picking. Even so, it is worth bearing in mind that the process is not a foolproof guide to future performance. Morgan Grenfell European had an AAA rating when the Peter Young affair broke and Jupiter's William Littlewood was always more of an A than an AAA-rated manager.
As Fund Research was keen to stress in the wake of the Morgan Grenfell incident, its research is not a recommendation to buy. By contrast, Forsyth sees its ratings as a recommendation to buy because it uses them in its own multi-manager funds.
Perhaps the lesson to be drawn from this is that if Fund Research has made more mistakes than its rivals when it comes to ratings, this is only because it has been going for longer. All ratings agencies will have their own inconsistencies and problems. The key is to be aware of exactly what the process behind the ratings is and what the strengths and weaknesses of each ratings service are.
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