Introduction to OBSR
OBSR AAA Rating
This is the highest rating awarded. It is given to funds which demonstrate very powerful investment processes and disciplines which OBSR believes will translate into exceptional long-term performance. The OBSR AAA Rating is an indication of excellence.
Link to AAA-Rated Funds»
OBSR AA Rating
This is determined using the same methodology as for the OBSR AAA Rating. The OBSR AA Rating is an indication of highly superior quality based on process and track record.
Link to AA-Rated Funds»
OBSR A Rating
This is again determined using a methodology consistent with that applied for the OBSR AAA and the OBSR AA Ratings. A fund which achieves the OBSR A Rating status is a highly commendable one.
Ratings are formally reviewed on a quarterly basis but may be changed intra-quarter should OBSR alter its judgment about the future prospects for a fund. Changes of this type are likely to be predicated by a significant 'event' such as a change in fund manager or a fundamental change in the investment process applied in the management of a fund.
In the event of a material change to the investment management of a fund, for example the departure of a fund manager, corporate action affecting the team or a change in investment process, which necessitates a re-evaluation of a fund, the rating may become suspended. Where a rating is suspended, this means that OBSR does not recommend new money currently be invested in this fund. Existing holders need not necessarily sell their holdings whilst the rating is suspended, however, they should be aware that OBSR is assessing the position and ultimately will make a decision to either reinstate the rating (possibly not at the same level) or withdraw the rating.
The OBSR Fund Ratings Service aims to identify funds which will achieve their objectives. The award of a OBSR Rating does not imply, however, that a fund will achieve positive returns, nor is the award an indication of the prospective returns from any particular asset class or asset allocation strategy.
OBSR Ratings are intended to be 'predictive' in nature. The aim is to identify the winning funds of tomorrow.
Link to A-Rated Funds»
The award of a OBSR Rating to a fund is intended to be a predictive indication of its quality. While past performance can be an important factor, the essence of the OBSR approach is to emphasise this qualitative aspect and the judgment and experience of their teams is critical in the OBSR Rating determination. This is the real added value of the OBSR Fund Ratings Service.
Introduction to FE Crown Fund Ratings
FE Crown Fund Ratings are supplied to FE Trustnet by its sister company,
the data experts FE.
They will be of interest to advisers who have conducted a preliminary asset allocation
exercise with their clients, and who now wish to identify the more promising funds
within their chosen sectors.
The ratings cover UK authorised unit trusts and open-ended investment companies
(OEICs). They are based on quantitive historical performance measures, and funds
are ranked within their own sectors. The lowest rated funds in a sector carry a
single FE Crown, and the highest are awarded five FE Crowns.
What do the ratings tell us?
FE Crown Ratings are compiled using three key measurements of a fund's
performance: alpha, volatility, and consistency.
Alpha is a measure of the fund's returns against its benchmark. It is the loss or
gain the fund has posted when the benchmark return is assumed to be zero.
Volatility measures the degree to which the fund's periodic returns vary either
side of its mean return. The larger the fluctuation, the more risky the fund is.
Consistency tracks the nature of a fund's overall return. Was this achieved steadily
over time, or were normally loss-making periods offset by a large atypical gain?
FE Crown Rating 5
These represent the top 10% of funds in their sector.
Link to 5 FE Crown Funds»
FE Crown Rating 4
These represent the next 15% of funds in their sector.
Link to 4 FE Crown Funds»
FE Crown Rating 3
These represent the next 25% of funds in their sector. By definition they will have
demonstrated a good, if not excellent, record across the three performance criteria.
Link to 3 FE Crown Funds»
FE Crown Rating 2
This rating goes to the next 25% of funds in the sector. Here we are looking at
performance that tends more towards the average for the sector. This could arise
from a consistently average showing across the three criteria, or from elements
of good performance which have been mitigated by a lower score in one of the other
Link to 2 FE Crown Funds»
FE Crown Rating 1
This rating comprises the remainder of the funds in the sector. It does not necessarily
indicate that there is nothing to recommend these funds, although this could be
the case. Equally, a meritable component of the rating could have been outweighed
by negative criteria that would be tolerable within some clients' risk/reward profiles.
These ratings are, of course, intended to offer a pointer towards funds that are
worthy of further investigation. Past performance is not a guide to the future.
The value of investments and the income from them may go down as well as up and
are not guaranteed. You may not get back the amount originally invested.
Link to 1 FE Crown Funds»
To be eligible for rating, a fund must possess the following characteristics:
- it has 3 years track record
- its history is accurate and consistent
- it is in a sector of 10 or more funds
- it does not belong to specialist or unclassified sector
Methodology behind FE Crown Fund Ratings
Recent history has been treated as more relevant than that of more remote past,
and the model is weighted accordingly. The fund's alpha measurements are taken over
36 months, 35 months, 34, and so on through to 12 months. This collection of alpha
measurements is then averaged to produce an overall alpha. In this way, the 12-month
measure features in every alpha calculation, while the 36-month figure is only included
once, and so the weighting is achieved.
The alpha for each fund is then re-scaled and ranked, so that the lowest becomes
zero, and the highest scaled as 100. The resulting value between 0-100 for each
fund is the alpha component of the rating.
The volatility measurements are treated in the same way as alpha to produce this
component of the FE Crown Ratings. This applies generally, but exceptions
are made for sectors which inherently carry lower volatility. For most bond funds,
volatility is only given half weight - scaled from 0-50 - and cash funds dispense
with a volatility component altogether.
This is based on the fund's total return history (with net income re-invested),
taking 3 years-worth of quarterly performance. On this basis, each fund is ranked
within its sector and its percentile performance established. The percentiles are
then averaged to produce an overall consistency measurement.
As before, the resulting body of figures is re-scaled from 0-100 to form the consistency
element of the rating.
In Combination - the FE Crown Rating
This is a matter of simply adding the three measurements to arrive at the FE Crown
value. The combined values are ranked, and ratings are assigned according to where
the fund falls within its sector.
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Methodology behind OBSR
OBSR Fund Ratings
Key Factors - OBSR Fund Ratings are determined on the premise that the fund selection process should, whilst taking past performance into consideration, ascribe greater weight to identifying the factors which will affect future performance. This process demands a much stronger emphasis on a qualitative examination of funds.
There are several key factors which lead to the final OBSR Rating determination. These are:
* Strength of investment process and length of time it has been in place
* Continuity of investment personnel
* Investment style that has proven durable over time
* Clearly defined investment objectives
* Strong and consistent past performance record
* Favourable risk adjusted returns
The OBSR Ratings are determined following in-depth qualitative and quantitative analysis with the emphasis more focused towards qualitative appraisals. OBSR follows clearly defined routines.
Discrete Time Period Analysis - The OBSR Fund Ratings Service analyses historical fund performance by looking at results over discrete time periods. It places greater emphasis on short to medium-term trends in performance than on long-term trends. Examination of performance over long time horizons can severely distort and disguise more recent movements. As the focus is to define the winners of tomorrow, OBSR believes that placing the emphasis on the short to medium term provides a more valid guide. This contention is supported by the many fund management company takeovers and mergers and fund manager moves which are a feature of the global financial services industry today. Changes to investment processes and/or the appointment of new fund managers can clearly, in many instances, bring into question the relevance of long-term historical performance.
Proprietary Classification System - The OBSR Fund Ratings Service uses a proprietary classification system across all regions and asset classes to group funds together by style. This ensures the "like-for-like" comparison of funds which, in turn, enables OBSR to remain agnostic about the type of fund chosen and to focus purely on the best managers. OBSR's extensive knowledge of funds, achieved through the rigorous qualitative analysis which they undertake, allows OBSR to build up a sample group of funds representative of different investment styles. From this, quantitative models are constructed that describe the behaviour of particular styles over specific time periods. The aim is to clearly identify groups of funds which exhibit similar characteristics.
Funds are ranked over discrete time periods according to their performance relative to what OBSR terms their true peer group - the OBSR defined universe. Funds can be moved between these universes at any time, as and when changes in style are identified through the OBSR qualitative analysis. The process also takes into account fund manager changes. Those funds that achieve the highest rankings in terms of consistency within the OBSR defined universe are then analysed under the Capital Asset Pricing Model, to assess their risk/return characteristics.
The objective is to determine whether a fund is justifying its fees relative to its systematic risk. This sounds rather technical. In simple terms, OBSR aims to measure the added value from any given fund. This process highlights funds worthy of further analysis and, thus, the possible consideration of a OBSR rating.
Corporate Issues - There are certain key areas that OBSR focuses upon, including an analysis of the strength of the investment team, the quality of its individuals and their experience, the level of research undertaken by the fund manager or the reliance placed on third party information. OBSR also considers the merits and demerits of funds being managed locally or at head office. The reliance on individual or so-called 'star' fund managers, as opposed to the adoption of a team approach, is also considered. OBSR assesses how vulnerable an organisation is to the departure of a specific fund manager, which may result in the OBSR Rating being revised.
OBSR attempts to identify particular strengths in order to assess whether an organisation is likely to be better than its competitors at managing specific types of funds. For example, strong asset allocation disciplines are more important in a fund management company which is heavily involved in the management of global or regional funds. To give further instance, when examining bond funds, OBSR will consider the quality of the organisation's skills in the interpretation of macroeconomic data, as well as its ability and resource in the evaluation of credit risk.
Fund Manager Interviews - In-depth interviewing of fund managers is the cornerstone of this aspect of the OBSR process. The aim is to gain a thorough understanding of the investment process applied in the management of a fund. This part of the analysis is ongoing. Old Broad Street Research carry out around 5000 fund manager interviews each year for the OBSR Fund Ratings Service and other research services.
There are a number of areas examined as part of the due diligence. OBSR has deliberately avoided the production and completion of questionnaires for fund managers. OBSR recognises that there are great differences in style and does not wish to be constrained by the need to 'straitjacket' fund managers with its own definitions and questions. Anyone can fill in 'boxes' but there is more required to gain real insight into a fund. OBSR prefers to make the assessment based on detailed discussion and, whilst knowing what questions they want answered, OBSR likes fund managers to describe their (and their team's) investment process and approach in their own way.
Ongoing Monitoring - The OBSR Rated funds are monitored continuously and their managers may be contacted or re-interviewed as frequently as quarterly. The objective of regular follow up is to enable the OBSR research teams to revalidate their understanding of a fund. Managers of other funds which may aspire to the OBSR Rated status are also interviewed regularly.
OBSR spends considerable time developing an understanding of how different investment management houses operate. They aim to gain a real insight into their investment style and to identify areas of expertise (and possibly, weakness).
Contrasting Investment Approaches - OBSR's analysis of investment groups, fund managers and individual funds points to the fact that, at times, very different approaches are taken in managing money in similar areas. Once OBSR has defined the strengths of a particular management group they begin to focus more on specifics. They wish to gain a clear picture as to how an individual fund is to be managed and how a company's overall methodology translates into practical day-to-day management.
The most important issue here is to obtain a clear definition of a fund's objective. OBSR examines attitudes towards managing an investment portfolio actively or passively, looking at:
* the growth and value investors
* the degree of aggression and attitudes towards trading
* the tendency to buy large, medium or small-capitalisation stocks and, where appropriate, the blend of these in the portfolio
* the degree of diversification or concentration in the portfolio
* how closely they follow the pursuit or otherwise of the sector themes
* the portfolio commitment to individual sectors and stocks either as core holdings or as temporary features.
Fund range ratings, for Pension fund and Insurance bond providers
Three tests are applied, each of which can result in a score of 1-3 ticks, and the overall score is worked out as a result of combining these three results to create an overall score. A triple tick score is the maximum score available in any area.
The tests have been chosen to give an indication of the access a pension product or insurance bond gives to the major asset classes, the level of flexibility it affords in providing alternative funds through which to gain exposure to those asset classes, and the performance characteristics of the funds involved.
Test 1 : Coverage
This test is designed to show that exposure to all major asset classes is afforded by the fund range available within the product.
All the funds will be checked for their exposure to the following asset classes:
* UK equities
* International equities
* Fixed interest
* Money market
If exposure to each and every one of these different asset classes is afforded by at least one fund in the range, the product gets a full triple tick score. If four or five of these asset classes is represented, the product gets a neutral two tick score, while exposure to three or less the product scores only one tick.
Test 2 : Depth
This test is designed to highlight the level of fund choice available within each of the key asset classes. Clearly, a product which offers only one fund option for each asset class is not as flexible as a product offering ten funds with exposure to each asset class, and this test is weighted so that a product is expected to offer more options where there are many funds offering exposure to a given asset class.
The number of funds in each of the following asset classes score as follows –
|Other (Hedge etc)||1-2||4+|| || |
Max score is, therefore, 24.
- 0-11 gets one tick
- 12-17 gets two ticks
- 18-24 gets three ticks
Test 3 – Quality
This test uses FE Crown Ratings – our quant based fund performance rating – to analyse the strength of the fund range on offer within a given product. Where funds have an underlying fund (i.e. mirror funds), the crown rating of the underlying fund is used.
The test counts the number of funds within the range which are rated three crowns, the number which are rated with two, and the number with one, and applies the following methodology.
A full triple tick score will be awarded if the number of two and three crown funds exceeds 50% of the total number of crowned funds in that range...
...triple crown funds are greater than or equal to 30% of all crowned funds...
...the number of two and three crown funds exceeds 55% of the total number of crowned funds in that range...
...triple crown funds are greater than or equal to 20% of all crowned funds.
A double tick score will be awarded if the number of double and triple crowned funds is greater than 45% but less than or equal to 50% of the total number of crowned funds in that range...
...the number of double and triple crown funds is greater than 50% but less than or equal to 55% of the total number of crowned funds in that range...
...triple crown funds are less than 30% of all crowned funds...
...the number of double and triple crowned funds exceeds 55% of the total number of crowned funds in that range...
...triple crown funds are less than or equal to 20% of all crowned funds.
A one tick score will be awarded for all other cases.
Overall result (Fund Range Rating)
Each triple tick score gets 2 points, a double tick gets 1 point, and a single tick gets none. So each fund range could get a maximum of 6 points, and a minimum of none.
- 6 points gets 5 stars
- 5 points gets 4 stars
- 4 and 3 points get 3 stars
- 2 points gets 2 stars
- 1 point gets 1 star
- 0 points gets 0 star
Absolute return ratings
Absolute return? A three step approach
To be assessed within the FE Trustnet Absolute Return section, a fund must have more than two years of performance history. If available, up to 6 years of history will be assessed.
Once the two year barrier has been passed, the performance of the fund is assessed on a rolling periodic basis – the periods depending on how many years of performance the fund has.
Step one: Positive returns
A brief period of very strong performance can put a fund at the forefront in its sector. This test eliminates the need for good fortune when timing your investment, by identifying those funds which produce consistently positive returns over any given period.
Within a given timeframe, how many periods of positive total returns has the fund recorded on a rolling basis? The ideal would be 100% positive periods.
The rolling periods used to test this are constrained by the length of available history. The following periodicity is to be used: Funds with...
- less than 2 years history – no test
- 2-3 yrs history – use 6 monthly rolling measurements for the 18 most recent month-end points
- 3-4 yrs history – use 6 monthly rolling measurements for the 30 most recent month-end points
- 4-5 yrs history – use 12 monthly rolling measurements for the 12 most recent quarter-end points
- 5-6 yrs history – use 12 monthly rolling measurements for the 16 most recent quarter-end points
- 6+ yrs history - use 12 monthly rolling measurements for the 20 most recent quarter-end points
Using these periods, one will end up with between 12 and 30 total return performance measurements. Each positive performance measurement will get a score of 1; neutral or negative ones will get no score. Scores will then be added up for each fund and expressed as a % of the maximum score possible for that length of history. So, for a fund with 5.5 yrs history, and a score of 12, the percentage would be 75% (12 out of 16).
Step two: Correlation
If a fund's performance is correlated to the performance of a market benchmark, consistently positive returns are only as good as the market supporting them. This test weeds out those riding on a bull market (as is the case currently for equities).
A benchmark, representing the nearest available equity or bond index (or sector average) to the underlying investments of the fund, needs to be used. In many cases, this will be available from factsheets. If not, a benchmark will need to be nominated by the manager/editor of this section. Cash and hedge fund benchmarks are not going to be of use, since they themselves are meant to be de-correlated from general market movements.
The R-squared of the fund versus the benchmark will be measured, again using the periodicity described in the previous section. Each R-squared result will be between 0 and 1. Ideally, a fund dedicated to absolute returns will have a low correlation to the benchmark, so the closer the R-squared is to 0 the better.
The R-squared scores from these periods need to inverted (1 minus the score) and tallied up to produce a final score. The final score is then expressed as a percentage of the number of periods used.
Once these first 2 steps are complete, the combined %'s need to be divided by 2. The closer to 100% the fund is, the more pronounced its un-correlated consistent returns have been.
As a guideline, the site will categorise the final % as follows:
- scores in excess of 75% identify funds which indicate strong absolute return characteristics
- scores of 60-75% identify funds which meet reasonable absolute return standards
- funds which fail to score above 60% do not demonstrate sufficiently the characteristics required to be identified as absolute return funds.
Step three: Absolute returns, but are they worthwhile?
Once a fund's absolute return degree has been determined, the final test is to examine level of returns it produces. Absolute positive returns are fine, but unless these returns exceed the ultimate absolute return asset, cash, then the whole exercise is somewhat pointless.
Total returns over the life of the fund, up to a maximum of 6 years, are compared to those available on a cash deposit, using a standard deposit rate benchmark, such as LIBOR (3 month).
The test will be done in 2 parts:
- cumulative annualised excess return of the fund compared to cash over the fund's lifetime (up to 6 yrs); result can be positive or negative
- using the rolling periodicity described in the previous sections, the % of periods where the fund's return has exceeded cash
All the calculations for the fund, its benchmark, and the LIBOR rate, must be done in the same currency.