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Who will be biggest brother in ratings war?

IFAs believe that Standard & Poor&#39s decision to offer its research free of charge may usher in a ratings&#39 revolution.

It could not have come at a better time. Faced with such a bewildering choice, often among products which at first glance bear no obvious differences, fund selection has become a time-consuming and tricky process.

Although companies such as Standard & Poor&#39s and Lipper produce regular fund research and ratings, most IFAs have been unable to afford to buy this information direct from the research companies. Until this month, an IFA subscription to S&P&#39s fund research cost £7,000.

Simpsons partner Andrew Merricks says: “We have not subscribed to S&P&#39s fund research and ratings until now. It was a ridiculous amount of money for something that is quite subjective.”

But fund research is a useful guide for negotiating the maze of funds available in Britain and S&P&#39s decision to make its products free to IFAs from this month may be the first sign of a shake-up.

Previously, IFAs have relied largely on fund managers for research reports – defeating the idea of truly independent research. But slashing the cost of research may encourage IFAs to subscribe to services such as S&P&#39s.

Competition could build up in the research market, with US companies such as Morningstar and Moody&#39s planning launches in the UK.

In the US, a choice of 8,000-plusmutual funds makes the UK market app-ear small. With such an array, advisers and direct clients have become increasingly dependent on ratings.

The internet has been the main catalyst to this, with fund supermarkets and other financial websites providing links to rating sites. Eighty-five per cent of all major US portals now use Morningstar.

Morningstar says it hopes to launch in the UK in January or February next year but this will not be its first attempt. Five years ago, its bid to break into the UK failed – a memory that does not seemto worry head of Morningstar Europe Hans Fjarem.

Fjarem says: “The market was not mature enough five years ago but companies now have the infrastructure to take on our information.

“We had fierce competition when we launched in Sweden a year and a half ago and now 85 per cent of the media and many private clients are using our service. I think we will be successful in Britain this time.”

Morningstar&#39s US operation provides investors with a very similar service to Lipper – a mainly quantitative rating service concentrating on past performance and risk.

In the US, a handful of fund research companies dominate the rating busi-ness but Lipper head of global marketing Steve Lipper believes the UKmarket is only big enough to support two major players.

He says: “The US market is muchbigger than the UK with around $7trillion under management in the US – and the markets are not big enough to supp-ort the same amount of fund research companies over here.

“The market always has a way of dissolving it down to two main players. I do not think you will have three dominant companies in five years time. One of them will have lost the pace.”

The winners will be those who can differentiate themselves from the rest of the field. Many IFAs remain sceptical about fund ratings but more players can only drive towards more efficient services.

S&P treads a slightly more subjective line, with more qualitative analysis as opposed to retrospective quantitative analysis worked into its fund research ratings.

Consequently, several funds with A or better ratings have performed very badly over the past year or so but have retained their rating due to S&P&#39s confidence in their management. For example, CGU&#39s monthly income plus fund, which is now the worst-performing fund in the UK corporate bond sector by quite a long way, has maintained its S&P rating of A.

At the other end of the spectrum, ABN Amro&#39s equity income fund is number one in its sector over one and three years but is still unrated by S&P.

Despite these discrepancies, Chase de Vere investment adviser Anna Bowes says S&P&#39s ratings are very important in its advisory process. She says: “Whether a fund is A-rated, AA-rated or AAA-rated is our first point of contact when recommending a fund. Admittedly, there are some good funds that do not have ratings and some rated funds whose performance has tailed off but the research is very thorough. Hopefully, the competition will see further improvements in fund research.”

There is still plenty of room for development within the UK rating market. Last week, S&P announced it is to start rating the UK&#39s tracker funds but investment trusts and venture capital trusts still remain largely unresearched by the major ratings companies.

S&P&#39s continuing global expansion would appear to have secured its future as a leading player in the rating market but the winner of second place will be harder to pick. Whatever happens, the struggle to provide better services at lower cost can only be good for IFAs.


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