Many intermediaries use Standard &Poor's Fund Research as a fund picking screen but just how consist...
Many intermediaries use Standard &Poor's Fund Research as a fund picking screen but just how consistent is it?
The group uses both a quants base and qualitative analysis and spent a large part of last year debating with investment houses how much they should pay for its ratings.
The fact that S&P bases its ratings on interviews with fund managers has caused many intermediaries to use it as a screening tool in their recommendations. However, at times the ratings can appear quite arbitrary and unless IFAs know the exact reasoning behind each grade, then they hold little value.
Martin Currie Japan, known to be a top performer since its launch, is to be downgraded to AA status because of average performance and a change in its investment team. The fund lost two of its investment team and they have been subsequently replaced. However, Investment Week understands the ratings agency is not satisfied the two new members have the same level of expertise as their predecessors, although the lead manager has remained the same since the launch of the fund.
According to Standard & Poor's the fund has underperformed over the past two 12 month discrete periods, although it admits it has performed well over three and five year periods.
So why is it that Rory Powe's Invesco European fund has retained its AAA status, when it too has underperformed the market substantially over the past year? According to S&P it is because it has performed well over the past three and five year periods.
So is the difference between the two in the added value of the qualitative process which looks at the changes to the Martin Currie Japan team changing? Not really. It still comes down to performance apparently. The difference between the two is whether or not S&P determines the investment performance is 'trending' downwards.
Powe has had a bad 12 months ranking 101 out of 101 funds in the European sector over one year and 37 out of 88 over three years to 25 April. Martin Currie Japan is ranked 15 out of 76 funds over one year and 24 out of 68 over three years to 25 April.
Of course these aren't the exact time frames S&P used, which shows how variable performance data can be from one period to the next.
In order for these ratings to be a positive support for intermediaries, a more in-depth knowledge of why funds are rated the way they are is going to be needed.
The stats alone make the decisions seem arbitrary.
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