Of the thousands of collective investments that UK investors have to choose from, relatively few make the grade as far as the ratings agencies are concerned. But when a fund – or its manager is deemed to be up to the mark, they can be awarded one of three grades: A, AA and AAA: AAA being the highest rating of all. The three names most commonly associated with ratings are: Standard & Poor’s, Forsyth-OSBR and Citywire.
Standard & Poors (S&P)
Essentially, S&P employs a 5-step process to determine fund ratings. The first step involves identifying those funds that have performed consistently well over three discrete year periods approximately 80% fail that test. Step two involves S&Ps analysts gathering all the facts and figures and background material they can find on the remaining funds. Next is step three – and possibly the most testing part of the whole process – when S&Ps experts meet with the fund manager to put him or her and their supporting teams through their paces. S&Ps lead analysts then present their findings to a rating committee who determine the funds rating (step four). The final step is on-going fund surveillance of all the rated funds, although all rated funds are reassessed every 12 months.
In common with S&P, Forsyth-OSBR rate funds rather than fund managers. Although past performance is taken into account, FORSYTH-OSBR places greater store in short to medium term performance than long term performance. Unlike S&P, FORSYTH-OSBR prefers to group funds by style or by peer group to help ensure comparisons are made on a like-for-like basis. Once a fund meets the initial performance criteria, detailed discussions will be held with the managers to assess the investment teams strengths and experience, to ascertain the quality of their research and to gain a thorough understanding of the investment processes they employ. Funds that are more likely to outperform their sector peers are rated accordingly and monitored continuously, although ratings are reviewed quarterly. In summary, an approach that is more qualitative then quantitative.
Because fund managers (good, bad and indifferent) tend to change jobs frequently, Citywire prefers to rate the managers themselves rather than the actual funds they manage. Citywire focuses on the managers who run the retail funds within the Investment Managers Associations key asset selectors income funds, growth funds and specialist funds. Ratings have nothing to do with analysts opinions but are based on monthly performance figures, offset against the degree of risk the fund manager incurs. The ratings look at a managers results over a rolling 36-month period: those managers who succeed in outperforming their benchmarks over that time are given Citywire ratings.
Each rating agency has its own process for determining degrees of investment management excellence. Furthermore, ratings in themselves are no guarantee of success; there are many funds which have no rating at all, but still do very well for their investors.