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Cynicism towards fund research misplaced

Research houses’ independence isn’t compromised by fund managers paying them, the boss of New Zealand’s oldest research firm says, and a fund manager agrees.

Friday, January 18th 2013, 9:24AM 8 Comments

by Niko Kloeten

Head of Fundsource Sam Stanley said he had been surprised by the cynicism shown by some advisers towards the research process, particularly after the FundSource awards late last year.

“If you were a fantastic performer and didn’t win [at the awards] it’s not because you didn’t pay us enough money,” he said.

Stanley said it seemed to be advisers who questioned the integrity of the process, while fund managers were happy with it.

“The ones who open themselves up to be reviewed by us are the ones who appreciate our research and also pay for it,” he said.

“We are a business and we have analysts, very good analysts, and that costs money therefore we need to cover our costs.  If they’ve already paid us we can still give them a one-star rating.”

Morningstar head of research Chris Douglas said Morningstar does not accept payment for reviewing fund managers’ products.

However, he said if fund managers want to promote their rating they need to pay for what he described as Morningstar’s “IP”.

Douglas acknowledged it wasn’t common for firms to want to pay to publicise a poor rating.

“There are a few examples where fund managers have paid to promote an average rating… it doesn’t happen a lot but it does happen,” he said.

Douglas said payment for promoting fund ratings made up a small part of Morningstar’s income, which was mostly from selling data and subscriptions to its services.

Pathfinder Asset Management executive director John Berry said paying to be researched is “a cost of doing business” for fund managers and it has no impact on the “rigorous” process the research houses follow.

Berry said it’s difficult to raise money in funds that haven’t been researched, such as Pathfinder’s International Equity Fund which has raised about $13 million in just over a year.

“We can’t market it; there’s just no point into the market and beating the drum if it hasn’t been researched,” he said.

“They want to see it have some time in the market before they research it… if they were just after the money they would have researched it straight away.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

« FMA considering guidance on low-end adviceFund managers call for level playing field »

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Comments from our readers

On 18 January 2013 at 9:37 am Independent Observer said:
Independent research is a useful tool to screen out the vast array of available products, to produce a more defined list of options. It can also highlight potential issues and innovations before the advisory market has had the opportunity to appraise these.

With the universe of products available in NZ increasingly including offshore capabilities, it is essential that the screening process has the ability to reach into the international engine rooms, to fully understand how these managers are able to add value. This globalised approach tends to favour those research entities with offshore affiliations or offices… making it difficult for localized research groups to compete.

Research is typically a high cost, low margin business where scale is a major factor – especially in a small community such as NZ, where there is probably only room for 2 providers.
On 18 January 2013 at 1:44 pm Bill said:
Not how the managers add value but IF the managers add value. Too many don't.

John Berry not included, he talks common sense
On 18 January 2013 at 2:15 pm Independent Observer said:
Bill is right - many Managers add little value (with the good ones getting caught up with industry 'averages').

Research is a useful first screen to sort out the wheat from the chaff... albeit a bit of common sense goes a long way.

It's also worth avoiding last years "best ideas" or those entities with significant commercial risks... as the Managers will rarely inform the industry when things are looking grim.

To do that efficiently, researchers need significant resources at their disposal.
On 19 January 2013 at 6:41 am Collin said:
Can anyone produce a published report, produced by a research house, that is negative (for the right reasons) on a fund manager that was commissioned by the fund manager? Payment influences views and hence it is almost impossible for 'paid-research' to be truly independent.
On 19 January 2013 at 4:34 pm brent sheather said:
This article is well timed. In today's (Saturday) Herald FundSource has the performance data for at least one of the Smartshares passive funds wrong. Omg !
Recall also FundSource's contribution to the shares vs residential debate when they used a gross index to measure share performance and a capital index to measure property.
OMG again.
On 22 January 2013 at 8:59 pm Realist said:
Brent - is it possible that maybe you have the performance of these Smartshares funds wrong. You've constantly claimed that the SmartFONZ was up 31% in 2012, yet if one looks at the 'official' performance data posted on the Smartshares website and the 'official' fact sheet, performance for 2012 was 26.39% BEFORE management fees and dividends reinvested.

So, I'm not sure if both Smartshares if it's possible for Smartshares to be wrong, if they're misreporting their performance they're n big trouble.

Also, of the 'major' fund managers, the only manager that this Smartfonz outperformed was the Fisher Growth Fund and this was by only a few basis points.
On 23 January 2013 at 10:15 am Bill said:
According to Aegis performance reports, our clients actual Smartfonz holdings did just over 30% in 2012.

I don't follow active managers but I did note a couple did less.
On 23 January 2013 at 4:42 pm brent sheather said:
Wrong !! The statistics police are never wrong..well rarely anyway.

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