Fund manager quality rating is a forward-looking assessment of a fund manager’s investment management capabilities and strength of its operational platform. Fund management industry facilitates investments for cross-section of individual and institutional investors, playing key role in capital market intermediation: participating in initial public offerings and private placements, equity and debt capital, and managing collective investment schemes and other related schemes. Fund managers acts as agents of their clients, responsible for implementing investing strategies and making investment decisions in accordance with stated investment objectives.

Rating criteria 

The criteria for assessing fund managers focuses on quality of investment expertise, robustness of portfolio management, risk culture, tolerance and risk management infrastructure processes, track record, competence and skills of senior management, governance arrangements and client services management of marketing personnel. Rating factors include:

Business model

The business model assessment is to determine the stability of investment manager’s business, inherent risks that may threaten the viability of operations, market opportunities, and robustness of business models to sustain competitive market dynamics and unstable markets. Factors assessed include:

• Nature of clients
• Products
• Target markets
• Distribution channels
• Strategic alliances with other providers

Market position

Market position focuses on the aggregate size of funds under management and penetration in the market over time. Diversification of products and services contribute to growth and sustainability of fee revenue. Complementary products provide for earnings diversification and distribution channels. International investments exposure creates added advantage to increasing their market share. Factors assessed include:

• Market share of funds under management
• Investors distribution in retail, corporate and others
• Diversification of investment products and services
• Complementary products and services
• International investment portfolio

Portfolio management process

Fund manager’s processes, strategies, policies, procedures, controls and monitoring systems’ responsiveness to changes in client needs and capital markets conditions are critical elements for measuring portfolio management quality. Well-developed investment policy is fundamental to portfolio management risk control and disciplined investment management. The investment policy determines the asset classes that can be represented in the portfolio, allocation among asset categories and rebalancing limits for allocations. The investment policy specifies constraints and restrictions on assets, such as liquidity, marketability requirements, and diversification concentrations. The following factors are assessed:

• Portfolio management processes
• Investment infrastructure scalability
• Investment policy guidelines
• Investment policy implementation
• Performance measurement and reporting
• Composition of investment committee
• Investment committee decision making process
• Investment research

Risk management processes, practices and regulatory compliance are assessed. Fund manager’s framework for identifying and measuring risks including market, operational, credit and liquidity risk and personnel responsibilities towards risks are also assessed. Risk estimation techniques such as value at risk, default risk analysis etc. and processes employed to monitor and control risks including scenario analysis, stress testing, internally defined limits for exposures are assessed. The quality of oversight provided by board of directors, risk committee, management information, regulatory ccompliance and internal audit function are assessed.

• Risk identification
• Risk measurement
• Risk monitoring
• Risk control
• Risk mitigation
• Regulatory risk compliance
• Internal audit role

The fund performance and track record of a fund manager provides insight into its capability to deliver a consistent and repeatable performance and to maintain competitive fund performance vis-à-vis its peers and established benchmarks with similar portfolio objectives and risk tolerance standards. Risk-adjusted returns and performance attribution analyses provide greater insight into the relative performance of investment portfolios.

• Portfolio rates of total return
• Portfolio total return breakdown and attribution
• Achieved portfolio objectives against established benchmarks
• Portfolio risk-adjusted returns

Financial performance of fund managers provides information about financial strength to remain well-resourced to support business growth and adapt to changes in its operating environment and regulatory requirements. Sound financial performance and cash flow position and capital buffers over and above the regulatory minimum capital situates the fund manager to effectively deliver on clients’ mandates. Factors assesses include:

• Growth of funds under management
• Revenue mix
• Operating margins
• Return on equity
• Return on assets
• Cost to income
• Liquidity position

The parent entity understanding the fund management business, financial strength, extent of commitment to the business, and potential conflict of interest between the fund manager and parent entity. Financially sound parent entity supports fund manager in times of distress. Although not contractually required, parent entity may be obliged on account of reputational considerations to support. Factors assess include:

• Parent entity’s stature and reputation in the market
• Parent entity’s net-worth relative to funds under management
• Extent of commitment to fund manager

Disclosure of cost structure, portfolio composition and method for computing net asset value (NAV) are key to achieving transparency with investors. NAV is the worth of investors’ net asset at a particular date, thus an important indicator of investment performance, which should not only be consistent with regulatory guidelines, but should also conform with industry best practices. Beacon Ratings assesses the following key factors includes:

• Disclosure of cost structure
• Disclosure of assets/entities invested
• Disclosure of portfolio composition
• Disclosure of method of calculating net asset value

The promptness in processing sale/repurchase requests, responding to investor grievances, proper and timely crediting of investment returns such as dividends and bonuses provides confidence in investors. Furthermore, fund manager’s marketing, distribution and clients service activities are important indicators of clients’ service standards. The use of multiple distribution channels maximises sales potentials and increases funds under management.

• Promptness in processing sale
• Promptness in repurchase requests
• Response time to investor grievances
• Proper crediting of returns on investment
• Timely crediting of returns on investment
• Distribution channels
• Quality of service delivery

Governance structure in terms of competence and strategic implementation to grow and defend clients’ investments.

• Board independence
• Governance structures
• Board committees
• Board oversight responsibilities

Senior management’s capacity to effectively execute strategies and protect investors funds. Factors include:

• Statutory compliance reports
• Management stability
• Management track record
• Management pro-activeness
• Line management’s track record
• Management’s appetite for risk
• Senior management succession planning

FMQR = Fund Manager Quality Rating