In trying to assess anything, we strive for a simple measure which makes sense, and quickly! Dudley Moore did it for Bo Derek in ‘Ten’, BMI tries to do it for health and fitness, the Gini coefficient did it for economic equality, SAT scores didn’t do anything except perpetuate inequalities, Hans Eysenck did it for IQ, but most importantly Robert Parker did it for wine.
Some are useful, others less so. BMI is a quick-fire answer, but flawed in many respects, not catching muscle density or fat distribution. Gini doesn’t explain why inequalities exist. Some you can use, but you need to be good at your subject to know the flaws, making the simple ‘score’ pointless, as it isn’t there to serve a graduate in the subject.
In the financial world for investment and pension funds, there are a few ratings agencies who analyse funds you might invest into. The aim is to come up with the easy marketing tool to show you who the ‘Magnificent Seven’, or ‘Nifty Fifty’ are, so you can make a quick decision.
Remember at the end of the movie, only three of the magnificent seven were still alive.
The original “Nifty Fifty” were a group of approximately 50 large-cap, high-growth stocks which became famous during the late 1960s and early 1970s for their perceived status as “buy and hold forever” investments. Today, only about 20 to 25 of the original Nifty Fifty companies are still independently trading today, with the rest having been acquired, merged, or gone out of business. The story of the Nifty Fifty is a great reminder of the importance of diversification, as even the most popular and high-flying stocks of one era, may not continue to perform in the future.
Many of the available agency ratings provide easy to read ‘Ten’ reviews but aren’t reliable enough to give you the full picture to invest. Let me rate the rating companies!
Morningstar’s Analyst Rating (nor Morningstar Star Rating) offers a comprehensive, forward-looking analysis that digs deep into management quality, investment process, fees, and even the culture of the parent company. The research combines both quantitative data (the numbers) and qualitative insights (the practical information).
Citywire takes a different approach, focusing on the performance and expertise of the fund manager rather than the fund itself. They assess how well a manager handles different funds over time, helping you gauge whether they have that elusive “magic touch” which can generate returns, i.e. qualitative research. If you believe in the value of a good fund manager, this rating system offers unique insights into their track record.
Square Mile excels at providing in-depth, qualitative analysis, often through interviews with fund managers. If you appreciate a bit of storytelling behind your investments, they do an excellent job of explaining the “why” behind a fund’s performance. You won’t find every fund you’re interested in here though.
For those who want to crunch the numbers, Lipper Leaders is data-heavy approach. They analyse multiple metrics and the quantitative rigor is excellent. It’s very light on any qualitative research.
FundCalibre is all about active management, identifying managers with a flair for performance. It has a neat “Elite” and “Elite Radar” system which is easy to understand. Its narrower coverage might mean your niche or smaller funds don’t make the cut due to the lack of breadth.
FE Crown Ratings are purely quantitative. It’s rigorous and considers risk-adjusted performance, but doesn’t dive into the softer, more qualitative aspects i.e. the real reason behind the numbers.
Morningstar Star Rating is probably the most recognised rating out there. It’s simple, straightforward, and based on risk-adjusted performance over multiple time periods. But, again, it’s all about the past and there is a lack of real meaningful data periods.
Trustnet is brimming with data but doesn’t offer a straightforward rating system.
The ratings are all about having the ability to quickly look at something and say – ‘that’s good’. Sadly, that ‘good’ will not be good enough to make a decision and you would need significant abilities to relate them to each other.
Painting by numbers is not for complex investment decisions.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a query in relation to borrowing to repay inheritance tax, call Darren McKeever on 028 6863 2692 or email info@wwfp.net
