Jan 26 2015

Fund research: would you pay for it?

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Fund research: would you pay for it?

Hopes that a disruptive new player will take the fund ratings industry by storm have hit an obstacle after a number of advisers have suggested it is unlikely they would pay for the agency’s research.

A straw poll of the industry has found that few expect new agency Fundhouse’s radical charging model to succeed, even though they welcome its pledge to deliver “straight answers on fund quality”.

The agency launched publicly last week and immediately awarded its negative Tier Three rating to Standard Life Investments’ (SLI’s) Global Absolute Return Strategies (Gars) in a scathing review of the fund.

While most existing UK fund ratings agencies are paid for by fund managers, who pay to promote ratings on their marketing materials, Fundhouse promises to be “structurally unconflicted” by only being paid by the users of its research.

However, while advisers cheered the new approach, five out of the six last week interviewed by Investment Adviser were doubtful that it would get off the ground.

“There’s a real danger they won’t get enough advisers to pay for it,” said Scott Gallacher, director of adviser firm Rowley Turton.

He said Fundhouse was “certainly something that we need” because “the current system of fund groups paying ratings agencies must leave them open to a conflict of interest, however well managed this might be”.

But he said he was “sceptical that the service will be a success”.

“Financial advisers historically are used to getting everything for ‘free’ via the product providers, so the idea of paying for anything is still alien,” he said.

“In addition, there appears to be a trend for advisers to outsource the investments to discretionary fund managers. Consequently, these advisers won’t be looking at paying for the Fundhouse service.”

Colin Rodger, managing director at Alexander Sloan Financial Planning, said the principle of increased scrutiny was a good thing, highlighting Fundhouse’s analysis of the fees charged on SLI’s £23bn Gars fund. But he said while for “pension fund boards of trustees this service could find a market”, he thought that “at a retail level I’m not so sure”.

He added: “It depends on cost, but it deserves to succeed.”

However, Fundhouse founder Rory Maguire said the business would be financially supported by its South African counterpart, which he launched in 2007 and which was making a profit.

He said he had been “overwhelmed” by the number of people subscribing to Fundhouse’s free service, which provides a simplified version of the full reports. “About 15 per cent” had asked Fundhouse for a fee quote, which he said was “a lot more than we expected”.

To mark its launch, Fundhouse released its full Gars report for free to advisers, criticising the fund for claiming to offer a diversified source of returns.

The agency claimed that more than 70 per cent of the fund’s performance since its launch had been generated by a limited number of fixed income strategies. It also claimed that SLI was earning roughly £158m per year from Gars just from its annual management fee, and called for a cap on the fund charges.

SLI responded that Gars had around 30 different strategies designed to generate “returns irrespective of prevailing market conditions”. It said that, by definition, not all strategies would be delivering returns at the same time.