The
Rating
Game
...
ROTHSCHILD
REPORT NO.16
In Australia
there are many organisations that research managed funds and provide
recommendations to financial planners. Some researchers also make
their ratings available to investors through web sites and the media.
The latter include Assirt, InvestorWeb, Morningstar and van Eyk.
Each
ratings firm uses different methodology and represents their views
in a different way. While Assirt and Morningstar use stars (1 being
a poor or young fund and 5 being a strong fund) InvestorWeb uses the
terms 'Strong Buy', 'Buy', 'Hold', 'Sell' and van Eyk Research use
A, B, Hold and FundWatch (not recommended).
All these
agencies combine their subjective views of a manager's corporate strengths,
product features and investment capabilities with some element of
performance analysis. The contribution of performance to the overall
outcome, however, varies considerably. Morningstar and InvestorWeb
use risk and return measures that make up some 50% of the overall
score for any product. Assirt and van Eyk, on the other hand place,
a smaller importance with only 25% of the final recommendation being
a result of past performance.
The agencies
seem to agree that five years is a meaningful period over which to
assess a manager's capabilities. Van Eyk use a combination of 1 year,
3 year and 5-year performance with the most weight being placed on
the 3-year return. Morningstar place the most weight on 3-month performance,
gradually decreasing the relevance as the performance becomes more
distant. Assirt gives equal credence to last month's performance compared
with any month in the previous five years.
Any number
in isolation does not mean much so what do the Researchers compare
a performance number to? Well again, the agencies take varying approaches.
Morningstar measures performance of any fund relative to its competitors.
Assirt puts more emphasis on whether the stated objectives of a fund
have been met and if it has beaten the relevant market index or not.
InvestorWeb and van Eyk use a combination of the two.
The agencies
also differ in the way they carry out their reviews. Some firms consider
each asset class in sequence and review all the managers that offer
products in that class. For example, all the Australian Equities managers
will be reviewed at the same time (van Eyk uses this approach). Other
agencies review each manager one at a time - encompassing all the
manager's products in an annual or bi-annual review (Morningstar and
Assirt). Some ratings are updated each month for the latest month's
performance (Morningstar) while others are static in between each
formal review which is typically at least 12 - 18 months apart (van
Eyk).
The implication
of this is that ratings are not all the same. It's important to recognise
which ones rely more heavily on subjective analysis and to what extent
they are driven by past performance.
An important
question to ask is "When was the most recent formal review carried
out?" At Rothschild for example, we have made some significant enhancements
to the management of Australian and international share portfolios.
This
was noted recently by Morningstar, which applauded Rothschild's move
to appoint Boston-based Putnam Investments Inc. to manage international
equities and gave Rothschild's two Five Arrows Discovery Global Funds
its top rating: five stars ("excellent quality").
As with
most important decisions in life, the lesson here is to gather as
much information as possible and not rely on any single indicator.
Together with your adviser, talking with the fund manager, and your
own reading and analysis of your investment needs, ratings can be
used to provide more confidence to your investment decisions or to
signal the need to do further research - the latter may even uncover
a gem!
For
information about Rothschild, please contact your financial planner
or Rothschild on 1300
65 65 68
between 8.00am and 7.00pm (Sydney time), Monday
to Friday.
or visit our website at www.rothschild.com.au
or
Email: raam.enquiries@rothschild.com.au
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ASIC and is available from the manager, Rothschild Australia Asset
Management Limited (ABN 22 000 727 659). Information is current at
time of publication.
The
information is based on Government laws and regulations current at
time of issue (October 2000). This information is not intended to
be relied upon for the purpose of making an investment decision. This
material provides general information only and does not constitute
financial advice or a recommendation in respect of any Rothschild
product and should not be relied upon as such. The material is made
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believed to be reliable and accurate. However, it is not intended
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