Allan Gray publishes independent agency’s ratings of funds on its Lisps

Allan Gray is publishing independent ratings of the local and offshore funds that it offers on its linked-investment services provider (Lisp) platforms.

Jeanette Marais, director of distribution and client service at Allan Gray, says fund ratings are readily available internationally, and some countries, such as Australia, do not allow funds to list on an investment platform for retail investors unless they have an independent rating.

Most investors do not have the time or the resources to research every fund or fund manager thoroughly, and ratings by an independent agency help to overcome this problem, she says.

Allan Gray chose Fundhouse to provide it with fund ratings, because it is an independent agency staffed by former investment professionals and because its ratings are based on an in-depth due diligence that relies to a very limited extent on historical performance, which is a poor indicator of future outcomes, Marais says.

Fundhouse’s limited reliance on performance data appeals to Allan Gray because the asset manager uses Fundhouse’s ratings to inform its choice of funds for the Lisp platforms, and Allan Gray does not want to have to change its offering frequently to accommodate changes in performance data, she says.

Fundhouse is based in the United Kingdom and South Africa.

Fundhouse says its ratings are designed to be forward-looking, rather than to reflect past performance, which does not tell you, for example, if the team that managed a fund has changed recently.

Another reason Allan Gray choose Fundhouse is that Fundhouse believes that successful fund managers must adopt a longterm approach to business and investment, Marais says.

Financial advisers who use Allan Gray’s platforms can vote for the funds they want included on the platforms from a list of funds offered by local asset managers and offshore managers registered with the Financial Services Board (FSB), excluding funds in the specialist equity sectors, very small funds and funds that have not built up a track record, she says.

Allan Gray tries to keep the number of funds on its local platform to less than 50.

Marais says Fundhouse is helping Allan Gray to find what it regards as good offshore funds that can be persuaded to register with the FSB, which would make them suitable for local investors and eligible to be included on Allan Gray’s offshore Lisp.

Allan Gray hopes that the Fundhouse ratings will add a layer of assurance to investors’ decisionmaking, and that it will help investors and their advisers to make the right long-term choices.

The company also hopes that including the ratings on its Lisp for offshore funds (funds denominated in foreign currencies and domiciled outside of South Africa) will help investors and advisers to consider lesser-known, but often betterquality, global managers.

The list of funds on Allan Gray’s local and offshore Lisps, as well as their ratings, can be accessed on Allan Gray’s website (www.allangray.co.za > “Our unit trust funds” > “Other investment options” > “Allan Gray’s investment platform” > “Investment platform fund list” or “Offshore investment platform fund list”).

Fundhouse has rated most of the funds on Allan Gray’s Lisps. The exceptions may be where a fund manager has decided not to participate in the rating process, or where the fund is a money market fund or a fund of funds.

Fundhouse plans, within the next 12 to 18 months, to publish ratings for the rest of the South African funds that financial advisers favour for their clients, Rory Maguire, a director at Fundhouse, says.

Fundhouse makes its ratings and the reasons for its ratings available to financial advisers for a subscription fee.

According to Fundhouse’s brochure, funds are ranked as tier one, two or three.

Fundhouse awards a tier-one rating to funds that, according to its assessment, are managed consistently by the same team within the same business structure, and are likely to continue to be managed in this way. Members of Fundhouse’s team invest their own capital in tier-one-rated funds.

Fundhouse accords a tier-three rating to funds about which it has a number of concerns.

Fundhouse considers four factors when rating a fund:

◆ The quality of the investment team;

◆ The parent company that offers the fund; ◆ The investment process; and ◆ Past investment decisions or major investment calls.

When it evaluates an investment team, Fundhouse considers whether it is experienced in the right areas, the level of staff turnover, whether past investment decisions can be attributed to the current team, and whether the team’s decision-making is characterised by genuine debate.

In evaluating a company, Fundhouse looks at how patient it has been with under-performance, because it takes time for a fund to beat the market.

Fundhouse looks at whether the company has a range of products within the areas in which it is competent and whether it offers investors value for their money.

It also considers whether portfolio managers invest in the funds they offer to their investors and whether their incentives are aligned with the long-term returns that investors receive.

Fundhouse analyses a manager’s investment process to determine if it is well defined, clearly understood by the investment team and investors, and closely followed.

When considering past investment decisions or major investment calls, Fundhouse looks for evidence that the manager displays “conviction” (the manager take a reasonable stake in a single security). It analyses whether the investment decisions were in line with a fund’s stated investment process and philosophy.