Rating of investment companies and criteria for evaluating managers

invest management
By Naim Fadhoud
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There are no two ratings of investment management companies for 2018 that match on the Internet. You can twist the evaluation criteria any way you want to get the “desired” result. Ratings will be a useful tool when choosing an investment manager, if you know how they work, what to pay attention to, and which of the “experts” you can trust.

What is the investment rating of a MC for?

Ideally the rating helps the investor to estimate the reliability of the managing investment company, the risks and the quality of the services. In the end – to predict the profitability of investments in financial instruments.

  • There are about 300 managing companies in Russia, professional securities market participants licensed to manage
  • funds. There are many methods to analyze their work, which is impossible for a common person to understand.

It would seem what could be easier – to open a public rating of managing companies and give your savings to the one who is leading in this list. In fact, rating is an independent market of services. There are many evaluation criteria, they can include quantitative, qualitative indicators, and even purely speculative.
Try typing “2018 investment company rankings” into a search box. You will find several dozen choices. Among them, no two will be the same. Even on the elementary indicator – the number of attracted clients – different ratings will give out different lists of MCs.

Ratings provide an opportunity to manipulate public opinion, as well as statistics and opinion polls. You can formulate the question so that the output will be two opposite answers. You can “forget” to add something to the calculation algorithm, to highlight the necessary data, to change the weight of the criteria at your discretion.

We often see in ratings of investment companies in Russia such a line as “general impressions”, where you can enter anything you want. For example, they are evaluated by the number of offices in the regions, as in the era of prehistoric materialism. Although these are serious infrastructural costs, which are ultimately paid by the client.

There’s no need to look at the rating as a last resort. It’s an auxiliary tool for choosing the right investment management company. You have to learn to read the ratings yourself and analyze the performance of investment managers.

There are no universal ratings. Those that are in the public domain, themselves need to assess their adequacy.
Criterion of attracted funds
The most common criterion, which is put in the first place in almost all ratings – the amount of assets under management. The same – the number of attracted clients, both indicators are closely linked. The top 5 companies in such a rating account for almost half of the total number of registered clients.

We have already said that the NAV (net asset value of the fund) criterion should not be regarded as the main one when choosing a mutual fund. The great number of clients and funds under management does not mean at all that the company is able to manage them better than others. For such MCs there are objective difficulties with getting return on assets above indexes on the financial markets. All their movements are too noticeable, they lose their maneuverability. The small value of assets is the other extreme.

How to evaluate the reliability of an investment company

We advise you first and foremost to pay attention to the reputation of the management company and its effectiveness over the long term. It is a good idea to start by finding out who owns the management company and who its shareholders are. If an investment company has only one owner, there will be no help waiting for it in a difficult situation, problems can arise.

Next, it is necessary to understand what funds the company manages. In addition to profitability, which goes without saying, you need to assess their quality. We explained how to do this on the example of mutual funds. The number of funds under management is an important indicator. You have to look to see whether they were all created recently and at the same time.

It is difficult to assess the work of investment managers in business. The most adequate approach is to look at the history of funds under management of MCs: how managers behaved during crisis situations.

For example, if we see that at the times when the Russian securities market was falling, the fund went into a tailspin, it means that there was no active management in it. A management company can move with the flow of the indexes, but you will pay a management fee.
Investment management fee. Maximum focus
Speaking of commissions to investment managers. This is probably the most important point when choosing an investment management company, when by all other criteria they are more or less similar.

 

Here we can see that managers’ fees can exceed 10% of the investment, even in bond mutual funds. If, for example, we see that the fund is focused mainly on buying and selling government bonds, even 2% of the fees would discourage investment.
In developed countries, asset management fees are now close to zero. In Russia, they were almost doubled after 2014, when the Central Bank raised its key rate to 17%, and it was possible to earn 20-30% per annum on bonds of top companies. The situation changed dramatically, the rate was lowered, but the commissions were “forgotten. The trend to reduce management fees began in the middle of last year, and only partially.
Infrastructure cost ratings do not take into account discounts and management fees on the purchase and sale of units. In total, they can also reduce the yield by 2-3%. All of these points should be spelled out in the fund’s management rules. Knowing about them is a must for making investment decisions.

Rating “with letters”: what do they mean?

Sometimes the description of an investment company may include the letters “A”, “A+”, “B”, and so on. This is the rating of the reliability and quality of service of the management companies. In Russia, in particular, it is done by the rating agency RA Expert.

  • It is done for professionals, it is important to assess the potential of the MC in the institutional market, but its conclusions can also be useful to individuals. The rating is made following the template of S&P, Fitch, and Moody’s credit ratings, which assesses an issuer’s ability to meet its debt obligations on time and in full.
    In February 2019, Moody upgraded Russia’s sovereign credit rating from Ba1 to Baa3. This means that the agency changed the credit risk for investors from “substantial” to “moderate”.
    Expert RA evaluates management companies on the basis of nearly four dozen criteria with different weights for the calculation of the final index. The list of indicators includes:
  • business reputation;
  • market position;
  • customer base;
  • management results;
  • risks;
  • other stress factors,
  • down to the reliability of counterparties, the qualifications of managers, and the software used.

 

 

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