IPAC Securities has today launched its star rating system which is designed to be a ready reckoner of past performance on a risk/return basis over the past three years.
The launch of its system is also likely to see the start of star wars between the two research houses.
FPG Research, which also has a rating system, has previously warned that the firm will oppose another star rating scheme.
However, the two are quite different. The IPAC Star ratings differ from FPG's in that it is purely based on quantitative information, and has no subjective opinion.
For instance a rating isn't determined by an analyst's view of a fund, and a rating doesn't change because an analyst dislikes something about a fund, such as a change in investment strategy or the make-up of a portfolio.
The IPAC rating system is based on the same methodology used successfully by Morningstar in the United States.
IPAC general manager David van Schaardenburg says the first step in the rating process is to calculate the IPAC Sharpe Ratio which is a simple risk/return measure, being the weighted average combination of three year risk-adjusted performance (75 per cent) and one year risk adjusted performance.
Next, IPAC compare that ratio of one fund against all the other funds in the sector.
Each fund is then credited with a star rating according to percentile rank. To gain five stars a fund has to be in the top 15 per cent, for four stars the range is 15-35 per cent, three stars 35-65 per cent, two stars 65-85 per cent and one star the bottom 15 per cent.
Van Schaardenburg says the ratings should only be used for illustrative purposes and should be used in conjunction with IPAC's qualitative research.
The ratings can be used as an initial performance comparative, an initial screen and to provide a signpost of where a fund has been, he says.
"The purpose and value of a rating is to assist investors with the selection of funds and to cut down on the amount of time spent evaluating funds," he says.
The ratings are calculated monthly.
IPAC Securities has today launched its star rating system which is designed to be a ready reckoner of past performance on a risk/return basis over the past three years.