Star ratings
Nearly half the managed funds on offer to the public aren't up to scratch and investors shouldn't waste them time even considering them
Tuesday, August 19th 1997, 12:00AM
Nearly half the managed funds on offer to the public aren't up to scratch and investors shouldn't waste them time even considering them, FPG Research executive director Richard Flinn said.Mr Flinn made the comments when he unveiled the company's new star rating system to an audience of financial planners in Auckland this week.
Under the rating system a fund is given anything from no stars to five stars depending on FPG's view on the fund. Mr Flinn said the rating is determined on qualitative and quantitative grounds.
Half of that rating is determined on past performance and the other half is comprised of FPG's view after researching the managers which includes an evaluation of its personnel, investment processes and corporate strength.
Of the 578 funds in FPG's universe, just 25 (or 4.3 per cent) gained a five star rating, while 233 funds had none. "That's the population of funds not worth considering to consumers," Mr Flinn said of those no star funds. However, managers are under no obligation to be researched by FPG. In fact a number have deliberately chosen not to pay FPG to be researched by the company.
The new star rating is an evolution of the company's former system which ranked the funds either as recommended or not recommended.
When the company moved from that system it argued the yes/no split wasn't flexible enough to account of all the necessary factors, and FPG wanted to be an information provider rather than a gatekeeper.
FPG said the its research now attributes a numeric score which equates to a percentage to a fund, and that allows a user to have a better understanding of the fund.
The new system though has some of the same elements as Mr Flinn says anything with three stars or more (that's 164 funds, or 28 per cent of the total) is an "investment grade" fund.
He said the star scheme is a baseline tool for investors and advisers to make their investment decisions and the company encourages people to tailor it to their own needs. Mr Flinn acknowledged such a system can be "artificially constrained" by its model therefore there is a need for users to customise it.
For instance the corporate strength of a manager is a major factor in determining its ranking, therefore many of the smaller niche players will not score highly, and that needs to be taken into account in the decision making process.
Using a star rating system is not a new idea. United States research giant Morningstar runs such a scheme which has now become a key tool for marketing managed funds. So much emphasis has been placed on the Morningstar ratings, that the company itself is warning investors to use it cautiously.
Mr Flinn said the difference between what FPG and Morningstar do is that the New Zealand version is based on quantitative and qualitative information, while Morningstar give stars based on past performance only. He said the New Zealand model was more robust and would be less volatile than Morningstar's which can be quite unstable from month to month.
The major reason for short term changes with the FPG system would be personnel changes, he said.
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