We have been asked the question of whether qualitative fund research is dead or not a few times in the past month alone. It seems inevitable that machines can process more data in a more unemotional and cost-effective way, spelling doom for the more expensive, qualitative fund assessors.
Combine this with the findings of the FCA report that suggests that qualitative assessments appear to be pretty poor indicators of fund quality, and you have a strong argument that qualitative fund research should be in decline.
If algorithms can be faster, cover more funds, offer the service cheaply, be unemotional and process far more data than any human could, then will qualitative research become redundant?
Bear in mind that the exact same set of criticisms have been levelled at active fund managers – we are both here to add value to clients in the same way. However, active managers get far more scrutiny on this matter than we do and this seems disproportionate and unfair on them. Finally, and fairly, we have the spotlight on us too.
As it stands the market seems to think qualitative research has a place. Even though the early roots of fund research were quantitative, if you look at the number of qualitative fund research businesses today, versus only five years ago, it tells a story. The sector is fast growing and has taken market share away from the quantitative-based approaches.
But should this trend continue if qualitative fund research isn’t, on average, adding any value? Here is where the trend in traditional active management has been the opposite, despite the same accusations. Smart beta and index strategies are on the rise and are eating into the traditional active management space.
Why is the opposite trend true for fund research? We think this is for one obvious reason: active managers publish their track records and this creates a clear public record of whether or not they add any value. Moreover, this intense scrutiny has opened the door for machines, because the evidence of active managers adding value is modest.
Qualitative fund research has escaped this level of examination, and this is why we suspect these research services have become so commonplace and even banal – it is a sort of free ride, where a service can be delivered without any ongoing scrutiny of the added value. No wonder it has become such a large industry, so quickly.
But this free ride could be coming to an end. Last year the FCA published findings on both institutional and retail qualitative fund research, suggesting we are not adding value, in aggregate. If this is true, there really should be a trend away from this research, rather than towards it as seen with active management.
The only way to find out if we do deserve our place in the food chain is to have a publicly scrutable track record, as asset managers already do – and then there will be no debate.
Rory Maguire is managing director at Fundhouse
