Research house ratings are useful for risk management but are not a reliable predicter of investment returns, consultancy Innova Asset Management has warned.
In a communication to InvestorDaily, Innova managing director Dan Miles argued it was “more important than ever” for investors to understand the limits of services and products from research houses.
Dealer groups and advice firms use on products provided by research houses as a “qualitative hurdle” when compiling approved product lists, but this was not enough to predict returns, Mr Miles wrote.
“It has helped the vast majority of financial planning groups to avoid most (but not all) fund blowups – which is clearly a value-adding service,” he acknowledged.
“While this process improves risk management, it doesn’t appear to translate into superior investment performance.”
Citing a number of studies, he said evidence from a report from the UK Financial Conduct Authority had found “negligible performance difference” between highly rated and less highly rated funds.
Additionally, a van Eyk Research study conducted in 2006 failed to identify “a positive relationship between fund ratings and potential outperformance”.
“That study also referred to the previous work of Blake and Morey (2000), whose ultimate finding was that ‘ratings, at best, do only slightly better than alternative predictors in forecasting future fund performance’,” Mr Miles said.
Mr Miles also added that research houses could not be relied upon to single out outperforming managers.
“This casts doubt on those research houses attempting to pick outperforming active managers to fill out their own portfolio offerings – at least consistently and on a risk-adjusted basis,” he said.
However, insofar as research houses provided asset managers with strategies to ensure minimum quality criteria were met, they provided “a very valuable service and shouldn’t be understated”.
“But a great fund rating is unlikely to lead to great investment performance,” Mr Miles said.
“There is really no investment tool that can reliably lead to outperformance over time.
“It’s very difficult to consistently pick winners.”
Innova is a subsidiary of Fortnum Financial Group.