Managers have their say on new ratings
Fund managers assess Morningstar's new fund manager star ratings, which are now solely based on quantitative research processes.
Thursday, July 3rd 2003, 11:00PM
by Philip Macalister
Morningstar has announced its new fund manager star ratings, which are now solely based on quantitative research processes.
Manager star ratings are derived from asset-weighted averages of the star ratings for the company’s funds, although they are now normally distributed and fund sizes relate to three years previous.
The new quantitative research process has extended the number of funds rated by Morningstar and enables more fund managers to have a manager star rating.
To be eligible for a rating, the manager must offer products in at least three of the categories used by Morningstar in its annual Fund Manager of the Year awards.
The latest ratings are based on risk-adjusted returns over three and five year periods but it should be noted that fund performance (which feeds into manager ratings) can be affected by timing differences for factors such as deferred tax.
Bank of New Zealand’s Grant Hill is disappointed that Morningstar has dropped the qualitative aspect to its ratings process.
He says BNZ were very strong proponents of the qualitative rating basis as it made the company look at its processes and improve them.
"It made us look very closely at what we were doing," he says.
However, he also notes it didn’t make BNZ change the way it managed money.
Meanwhile, Westpac is pretty unhappy with the changes for two main reasons.
The first is that there is bias in the way the ratings are calculated, investment solutions manager Peter Dykes says.
He says the ratings are based on funds three years ago, and all the funds are rolled up on a weighted average basis.
Three year’s ago Westpac mortgage trusts accounted for just 5% of its business, now the fund, which has more than $750 million in it accounts for 52% of funds under management.
Dykes says the rating doesn’t reflect the performance of the Westpac funds.
His other main concern, and it is acknowledged by Morningstar, is that the treatment of tax losses impacts on performance and therefore ratings.
“The latest ratings are based on risk adjusted returns over three and five year periods but it should be noted that fund performance (which feeds into manager ratings) can be affected by timing differences for factors such as deferred tax,” Morningstar says.
Because Westpac has a conservative policy in this area it suffers under the new rating model.
Dyke says because of this the “comparisons are a bit meaningless.”
His view is that the industry needs to come up with a solution to this problem so that funds are compared on a like for like basis.
BT Funds Management chief executive Craig Stobo is supportive of the new system.
While BT has dropped a star that’s partly due to the fact it is predominantly a growth manager and these assets are out of favour at the moment. When the market picks up and returns improve BT should move up the table.
Stobo says the decision to only rate managers who have funds in at least three asset classes means that firms are being measured on “general competency”.
While there is some criticism of ratings Stobo says they are a useful tool to help screen funds.
The head of National Bank’s funds management business Gareth Fleming says that his five star rating “vindicates” changes the company made a number of years ago.
Naturally he is happy with the rating, but says that the bank isn’t “going to promote the fact too heavily.”
He says that one of the benefits of the new system is that ratings should remain quite stable.
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