Fund selector rating platform targets Asia growth
A pioneering platform launched last year by two Israeli brothers to rate fund selectors is looking to expand in Asia, in a move welcomed by regional industry experts.
It is a cautious welcome, though, as the greater transparency it promises has the potential to encourage more herd-like thinking, according to some in the market.
The SharingAlpha platform, which aims to fill a perceived gap in the market by providing end-investors with a sense of just how good fund selectors are based on their own predictions, is also some way from achieving the required critical mass in Asia.
“We have some fund selectors from Singapore and Hong Kong but we don’t think we are even remotely close to attracting the potential number of raters we could have from the region,” Oren Kaplan, co-founder of Sharingalpha.com, told AsianInvestor in an interview.
The platform launched in February 2016 by Oren and Yuval Kaplan and entirely self-funded currently covers just over 700 fund selectors. “Over half of them are from Europe, since that is where most of our marketing efforts have been concentrated,” he said.
To qualify for a ranking a professional fund buyer must rate at least five funds from the 100,000 available in the Morningstar database and on average members rate about 18, Oren Kaplan said.
The platform then tracks the performance of these rated funds. “If the predictions are right, we rank their capabilities relative to their [fund buyer] peers.”
The data generated from the fund-ranking process also provides a view on how funds are expected to perform instead of relying on backward-looking data, Kaplan said.
Low penetration
But as logical as the thinking behind SharingAlpha may sound, the platform could still struggle for traction in Asia. That's because, as the report 'Asian asset management’s inflection point' by Standard Chartered noted last year, investors in Asia have yet to embrace mutual fund products as savings vehicles, aside from the high net worth clients of wealth managers.
Mutual fund penetration (as a share of household financial assets) in Asian markets such as China, India, Singapore, Korea and Taiwan, averaged 10.4% in 2015, data from Cerulli Associates shows.
In comparison, mutual fund assets account for about 20% of US household financial assets, according to a report released in February this year by the Investment Company Institute. Fifty-five million households (43.6%) own mutual funds in the US.
Nevertheless, increased financial liberalisation, deepening capital markets and ageing populations are propelling rapid Asian asset management growth, the StanChart report said.
The Mutual Recognition of Funds schemes, in particular, have the potential to turn Hong Kong into a large asset management centre for mutual funds sold into China, it also noted. Similarly, the two Asian fund passports—Asean Collective Investment Schemes and the Asia Region Funds Passport—offer great promise.
“But like Europe’s Ucits scheme that they are modelled on, they are likely to take time to make a difference,” the report said.
Getting Asian investors to accept the merits of fund selection, therefore, is also likely to take time and a fair bit of education.
Other benefits
But Kaplan notes other possible benefits that could flow from having more fund selector ratings, because for fund selectors it provides a means for building up reputations for generating alpha, much like fund managers can.
That’s a sentiment broadly shared by Seattle-based Adam Jordan, director of investment research and management at Paul Ried Financial Group, who joined the platform in October last year as an experiment.
“As the platform has grown, it has started to look like a promising idea,” he told AsianInvestor.
He has rated just over 100 funds on the platform, which he said is about the number of funds he actively monitors in his day job as well.
Still, one year is too short to judge the efficacy of the platform or the fund selectors rated, he believes.
“With mutual funds, it’s best to take a long-term approach. The ideal rating period should be over an entire market cycle,” he said, adding that he believes the platform and selector ratings are likely to prove their worth over time.
Caveats abound
However, there are some caveats. Paris-based Stephane Pouchoulin, CEO of FundQuest Advisor, the fund selection arm of BNP Paribas Asset Management, noted that performance should not be the only factor on which fund selectors are judged.
“Investors also need to consider risk-management and operational due diligence before selecting a fund manager," he said.
Pouchoulin does not participate in the ratings platform run by the Kaplan brothers.
Singapore chief investment officer of private bank Bordier & Cie, Bryan Goh, another non-participant, added that while more information about fund selector performance is a good idea, it’s also important to see how that information is used.
If a standard is widely adopted it could increase systemic risk, he said.
In other words, too much dependence on fund buyer ratings could lead to more of an investor herd mentality, which could have a destabilising effect during times of market stress.
“If everyone rates the same set of funds, you could end up with a similar selection of funds rated good or bad, which doesn't allow for clients (private banks, institutional investors, wealth managers, etc.) to differentiate themselves from their competitors,” said FundQuest Advisor’s Pouchoulin.
It could also lead to fund capacity and liquidity issues on selected funds, he added.
Rainer Michael Preiss, Singapore-based executive director at multi family office Taurus Wealth advisors, also believes other factors take precedence over pure fund selection.
“The real value comes from portfolio construction; the underlying products can be generic even to a large extent. But portfolio construction that allows real diversification is what is really important,” he told AsianInvestor.