Fund ratings make a muted comeback

After laying low for a few years, Standard and Poor’s (S&P) is again knocking on doors in Asia trying to encourage money managers to get their funds rated. And a few are biting. The agency is now preparing a rating for an institutional money market fund in Singapore and has one or two new prospects in Taiwan and Hong Kong.

The renewed interest comes after a long period of apathy towards mutual fund ratings. Even though the independent analysis offered by a world-renowned agency can make it easier to win over investors and sign up unit holders, the idea has been slow to catch on in Asia. After 10 years of offering the service, S&P has rated a total of between 40 and 50 mutual funds in the region. And most of these have been funds managed from hubs like London and the US and sold to overseas investors.

This poor take-up rate is in contrast to the popularity of ratings in Australia where 20 of the top cash funds are rated, including the country’s largest cash trust run by Macquarie Bank with assets worth A$7 billion ($3.64 billion). Last month, S&P announced that it would soon add Australian equity funds to its field of reference, with the first ratings due in July.

The reason for the disinterest in Asia is two-fold, says David Collins, director of the agency’s fund services group in Melbourne where much of the analysis for the ratings is conducted. “Obviously our efforts in Asia have been impacted by the fickle financial markets since the crisis began back in 1997,” he says.

“An unstable environment makes funds reluctant to seek ratings for fear that external circumstances will make it difficult for them to maintain a good rating. But there is also a culture of short-termism in Asia. Many investors flip funds like they would flip stocks, and money managers feel that, in this sort of setting, ratings don’t really help them in their marketing efforts.”

Lastly, Collins says there is a problem with disclosure. He says local fund managers can be wary about opening up to analysts whose job it is to lift the lid on the credit quality of a fund’s core assets.

But S&P is hoping to change this listless attitude towards ratings with a renewed push to get fund managers to sign up. This follows a global initiative by the agency to market its rating brand called Fund Rating Icon.

The first targets, says Collins, will be bond and cash funds. “In Taiwan we have rated the bond and money market funds of Grand Cathay and Fubon,” he says. “And these ratings have been well-received by investors. If our experience in Australia teaches us anything, the trend is that once a few funds begin to reap the benefits of a rating, their competitors soon line up to be rated too.”

S&P’s fund rating process involves analyzing the underlying assets of a particular fund using qualitative and quantitative inputs. Quantitative data on things like fund performance and industry ranking is usually supplied by the agency’s fund ranking arm, Micropal. Then the analysts conduct detailed interviews with the fund’s managers. For bond funds, S&P also looks at the credit quality of the fixed-income securities held in the portfolio, and for cash funds it measures liquidity, or a fund’s ability to pay out to investors.