Standard & Poor's Fund Services is to issue fr ratings to UK index tracker funds for the first time ...
Standard & Poor's Fund Services is to issue fr ratings to UK index tracker funds for the first time next month.
The move could prompt tracker funds in the industry to drop their charges and reduce their bid/offer spreads, in a bid to achieve frAAA status.
Guy Boden, associate director of S&P Fund Services, said some 23 UK tracker fund managers are now being interviewed, and their processes assessed, through combination of qualitative and quantitative measures.
S&P expects to issue a report which includes these ratings at the start of September. Key factors taken into account are internal tracking error, total expense ratios and the spread between the bid and offer price.
Boden said funds could receive the top rating of frAAA immediately. A fund would be well poised to receive such a rating if it had a low tracking error relative to its benchmark, a low total expense ratio and a low load difference between the bid and offer price.
There is no limit on the number of funds that will be able to achieve the top rating, providing they meet the above criteria.
Boden said that during the interviewing process there had been some feedback from fund managers indicating they would consider reducing charges, to qualify for a higher rating.
Although the ratings group considers it important for actively-managed funds to have a fund manager in place for a certain period of time, this will not have as important a focus in tracker funds during the assessment process.
Boden said: "In actively managed funds the manager's flair for picking stocks and sectors is important and plays a big part in performance, whereas in tracker funds the systems in place have a much higher influence."
Other factors to be considered include the qualitative processes of the asset manager, computer back up and the methodology for dealing with new entrants and departures from the index, or mergers and acquisitions.
The approach to replicating the index, whether full or partial, is also being taken into account.
Boden said tracker funds had been traditionally looked at in terms of their performance, however this should not be considered the most relevant factor as trackers which are outperforming its index, could be taking some form of risk.
Like other UK unit trust sectors, tracker funds will be re-assessed, with an updated report issued annually.
John Kelly, investment director at Barclays Global Investors, welcomed the move, saying although index tracking appeared simple, it involved extremely objective management procedures and he welcomed a system which recognised the better of these systems.
He said: "It is the subtlety of tracker fund managers that make a difference. The S&P fr ratings will recognise this and I believe those values will become even more apparent over time."
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