Who researches the researchers?

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Saturday, October 15th 2005, 1:28AM 1 Comment

by Philip Macalister

Investing in fixed interest is the theme of this blog and I picked this topic for several reasons, not to mention that it features in Asset this month.

One is that funds flow is still cascading into income assets. Added to that there are many new fixed-interest investments coming onto the market.

While fixed interest is still the "hot" sector it seems that advisers still need to understand it in more detail as it changes.
One of the more contentious issues within this area is the role of researchers. In our work looking at the issue of research we found that very few people would go on the record about the subject.
Clearly ratings services are slowly starting to become the gatekeepers for funds flow and are starting to influence investment decisions.

Finance companies are loathe to publicly criticise them because it could impact on future ratings.
The evidence for this is more anecdotal, and fits with arguments of some years ago about managed fund ratings when the two research houses in this space were fiercely competing against each other.

A question which has been asked in the managed fund area in the past is equally relevant in the finance company sector now.
Who researches the researchers? Currently anyone can hang out their shingle and call themselves a researcher. They don't have to have experience and they don't have to disclose their credentials.
Sound familiar? It's the same criticism that dogs the advisory industry.

People providing "research" can play a powerful role in the industry. Indeed poor research can have far-reaching consequences as the uninformed public can make potentially costly decisions based on it.

There is an argument that the finance company sector should be subjected to a compulsory ratings regime, just as life insurance companies have to have claims-paying ratings from reputable organisations. There should also be a requirement that finance company researchers are put under the spotlight themselves.

Research around finance companies needs to be done on a qualitative and quantative basis. Currently there are two firms offering ratings solely on a quantative basis and one of them is, in our view, suspect. Its results don't stack up, there is no track record or experience or expertise in this industry and there is no transparency around its process.

One thing which needs to come out of the government review of the non-bank sector is much tougher rules for people and companies which provide finance company research.

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