How to use the ratings

Selecting an investment vehicle from all funds available to investors is not a mechanical process. It combines art and science, judgment and analysis. However, in this process all available information needs careful consideration. As the ratings are based on historical data, they are not necessarily indications of future performances. The ratings are intended for use as a step in the evaluation process for investors as various factors such as investment goals, risk tolerance, costs and administration efficiencies should be taken into consideration in the selection of unit trusts. If the classification standards of multi-asset classes are too wide to allow transparency in the comparison of returns or risk-adjusted returns, the industry may wish to consider refining the fund classification into sub-groups that are more homogeneous in terms of investment goals.

Lowly rated funds should not summarily be discarded. A lowly rated fund may have great prospects due to a change of portfolio manager or a change in the investment process of the investment house. The fund’s assets may have been strategically aligned with the investment house’s philosophy and style and this strategy may have led to underperformance. Do not blindly select highly rated funds. Use all available tools to track and research the performance of the fund and investment house. The highly rated fund’s future prospects may be in jeopardy due to a change of portfolio manager or merger of management companies or a downward trend in the overall investment performance of the investment house. Do not ignore funds that have not yet been rated due to a lack of performance history. The portfolio manager or investment house responsible for the management of the fund’s assets may have an excellent record of superior performance and there is no reason why the fund should not eventually achieve a top rating.

If a fund’s rating has dropped significantly you should research what has caused it. Has the portfolio manager of the fund changed? Is he taking on bigger risks than in the past? Has the fund experienced such an inflow that the portfolio manager’s ability to manoeuvre has diminished? Is this the only fund in the investment house’s fold that is underperforming? If not, has there been a major change in the investment team’s investment process? Is the management company concerned about it and what steps are being taken?

Whatever supplementary considerations an investor may wish to introduce in his/her investment decision methodology, it would probably be unwise to ignore the information contained in the historical rankings of funds or management companies as point of departure.