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OUTSIDE EDGE: Michael Owen

Performance rating concerns have been in the news again. The 11-strong consortium of UK-based fund managers, including heavyweights, such as Schroders, Credit Suisse, Fidelity, Invesco and Threadneedle are seeking a meeting with the three biggest ratings agencies, namely Lipper, Standard & Poor&#39s and Morningstar.

The consortium&#39s conten-tion is that funds sold in Europe are not always positioned by the agencies according to their “true position in the market place”. In short, they want to ensure that both advisers and the public can compare like with like and wish to explore the possibility of establishing the UK model, involving the Investment Management Association performance category review committee on a pan-European basis.

I see this as a laudable principle in providing a more uniform approach so that fund comparisons can be made more meaningful, ignoring for now the debate on the use of past performance in the decision-making process.

For example, rather than separate out bond funds into corporate, government and mixed, Europe still brings them together in comparative sectors. One can see why fund management houses get vexed on those issues when according to research to be published shortly by the US consultancy firm Cerulli Associates, a staggering 97 per cent of net new money in the US this year has gone into funds ranked in the top third by Morningstar.

Fund rating is big business and yet the agencies would argue that what works in the UK cannot always be replicated in Europe, where there are even more available funds to choose.

However, I endorse the consortium&#39s view that we should look to adopt a European-wide standard for fund classification, involving all segments of the industry, including investors.

For IFAs, in spite of the FSA&#39s misgivings, it is clear that data and performance indicators are becoming increasingly important. But, rather than just deal with the raw data, we have a duty to analyse the figures and take into account factors such as investment style, risk, etc, when recommending funds to our clients.

While fund management houses are demanding common standards on ratings, I would hope they will all co-operate with the likes of Morningstar and provide them with the required data – we too need common standards based on accurate information passing from management groups to the agencies.

IFAs have to grapple with an expanding number of ratings agencies and to identify strengths and weaknesses of these competing systems. There will be pressure from the regulators and the public, particularly in the light of poor equity markets and the zero debacles, to focus on risk.

Again, though, there are major differences in the way “risk graded” data is compiled but could there be an industry agreed method of measuring risk? Risk-adjusted performance is likely to be a growth industry going forward but we return to the problems of standards.

The industry will have to work with the ratings agencies and other bodies to achieve commonality of approach to the thorny subject of risk.

Likewise, more work needs to be considered on providing the public with appropriate standard benchmarks against which we can measure funds. Advertising is already the subject of scrutiny but again needs standardising, so the XYZ marketing team do not tell us about stellar performance over the last 44 months or, even worse, promote a fund where the manager responsible for excellent past performance left a year ago.

Widening the scope of this article from European fund standards towards benchmarking, advertising, risk assessment, etc, I conclude that alth-ough perhaps a dull concept, commonality could be worth striving for in many parts of our industry.

Michael Owen is joint managing director of PlanInvest


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