A better way to rate funds?

Around the world, the asset management industry is feeling slightly nervous. There is an appreciation that disruption is coming.

User-generated ratings website Sharing Alpha, developed by Oren Kaplan and his brother, has created a stir in Europe where it is giving financial advisors a more prominent voice.

Speaking at a recent seminar, Kaplan identified a major problem in the industry.

Most traditional fund ratings are based on past performance, yet this on its own is a very poor indicator of how a fund will perform in future.

“There is $100 trillion invested with active managers around the globe and most investors decide which fund to select based on how they have performed in the past,” says Kaplan. “Despite all the research showing that this gives no indication of future performance, it gives them some comfort.”

Sharing Alpha was developed, in part, to address this issue. As a user-generated fund rating platform, it creates the means for funds to be independently rated on measures other than past performance.

“We invite advisors from all around the world to rate funds,” says Kaplan, “and the incentive we provide is that we then rank the raters. We compare their rating with the performance of the funds over time, and if there’s a match they receive a higher rating on our platform.”

The funds are all given ratings not on how they perform, but on the parameters of price, people and portfolio.

The first looks at the costs associated with the fund, the second considers the team responsible for the fund and issues such as manager tenure, and the third covers how the fund is put together.

The platform is built on the same concept as TripAdvisor, which works on the “wisdom of the crowd”. And increasingly people want to use these kinds of user ratings systems that they believe offer the best independent viewpoint.

Where Sharing Alpha differs, however, is that only the ratings from professional fund buyers are used in the fund ratings on the site.

This reduces the possibility of fund managers rating their own funds highly, or competitors giving poor ratings.

“Secondly, as time goes by, people receive a ranking from us in terms of how good they are at fund selection,” Kaplan says.

“We use that rating in order to improve the overall fund ratings.”

Kaplan believes this also reduces the risk of the system being “gamed” by someone who wants to try to push a fund rating higher or lower.

If they are wrong about how the fund performs, ultimately their opinion will count for less.