HONG KONG - AIG Investment Corp. (Asia) Ltd. and Schroder Investment Management (Hong Kong) Ltd. earned the highest marks for business acumen and investment expertise, respectively, in newly released ratings by RCP & Partners.
In its survey of Asian investment managers, the rating agency also revealed that smaller managers frequently were as capable of handling institutional mandates as the larger managers.
Investment management houses in Asia generally demonstrated better investment than business acumen, RCP concluded. Any weakness on the business side is "due generally to the youth of those organizations and the fact that very few firms in Asia, other than the large organizations, have a long track record," the rating agency said.
RCP has been rating investment management organizations for two years and recently published for the first time its ratings of 28 managers of Asian funds. The Asian fiduciary rating program, called Investment Manager Report-Asia, is intended to measure risk for the investor entrusting funds to a manager.
RCP & Partners, headed by Robert Pouliot in Geneva and Shane H. Norman in Hong Kong, launched its efforts to evaluate Asian fund managers in 1995, inspired by European institutional concerns about Asian practices and what was seen as relatively less transparency among fund managers of the Pacific Rim.
More performance diligence
Mr. Norman said there has been a noticeable shift in attitudes toward investment management firms since IMR-A's launch. He pointed to an overall higher level of professionalism among the firms studied.
"Two years ago, a minority (of investment managers) would have had IMR-A compliance in their performance presentation or have annually updated compliance manuals," he said. Such elements had usually been found only in the largest and best equipped firms. "Now you find that kind of procedure and diligence spread all through the upper areas of the industry in terms of size and now creeping down to the mezzanine layers."
The move toward higher levels of professionalism was a reaction to competition and the accusations of malpractice lodged among firms such as Morgan Grenfell Investment Management and Jardine Fleming, he added.
RCP has had some surprises studying its selected universe. Originally, Mr. Norman said, the firm had expected the larger managers would achieve better ratings and the smaller ones would show themselves as weak. Instead, RCP officials have found size makes no difference to the standard of excellence achieved.
"We have quite small investment managers who are very nicely rated against more substantial ones," he said, although larger managers get somewhat stronger business ratings, thanks to their more robust capital adequacy and more developed marketing networks and training systems.
Mr. Norman welcomed this unexpected evidence of achievement among smaller firms, and decried the tendency for "all the institutional mandates to go to the biggest and strongest firms."
The rating agency recently assessed its first European subject, ABF Capital Management S.A., Paris. It is also commissioned to profile 50 European managers for one of the "Big Six"consulting firms.
Asked to compare Asian managers with his experience of European, Mr. Norman said Europeans' operations were more readily discernible than those of Asian-based houses. While Asia has moved a long way forward in this regard, it still is behind Europe.
However, "Asians stand second to nobody in managing Asian assets," he said.
How the ratings work
On the investment management side, IMR-A assesses the quality of staff interaction, trading culture and portfolio turnover. Also measured are the mix and stability of clientele, information technology, research quality, efficiency and premises. Scores range from Alpha to Lambda, with only Schroder Investment Management (Hong Kong) Ltd, achieving Alpha, the highest.
As for a firm's business management excellence, IMR-A scrutinizes size, stature and financial muscle, profitability, financial disclosure, rate of growth, relationships with clients, marketing efforts, exposure to competition and means of compliance.
The highest rating possible is AAA+, which no company achieved. AIG Investment Corp. (Asia) won the highest mark - AA+.
Firms that rank low - below Gamma on the investment side or BBB+ and lower on the business scale - are deemed unsuitable for institutional mandates. Among these were Comgest (Far East) Ltd. Hong Kong and Fatum Fund Management Ltd. Hong Kong.
However, Mr. Norman pointed out such a rating does not necessarily indicate a bad manager. But it could mean their investment process is insufficiently detailed or there exists an obvious conflict of interests with a related broking or banking firm.
Special Assets Ltd., a Hong Kong-listed fund manager that deals exclusively in Asian markets, received a Beta investment rating and an A+ for its business practices. Chairman and Managing Director Robert L. Meyer called the score "not too bad."
"We had a great year last year. This year has been difficult because we have had exposure in a number of Asian markets which provided no diversified risk because they all went down. We are bottom-up stock pickers, not top-down allocators," he said.
Special Assets is reviewing its portfolio, he added.
Mr. Meyer called the IMR-A rating program "very intensive and comprehensive" and he described RCP & Partners as "diligent.
Understanding firm's anatomy
"They try to understand the anatomy of how fund managers are structured."
However, one fund manager, while acknowledging the importance of independent scrutiny, felt some rating agencies might have preconceived notions. Ian McEvatt, chief executive of Indocam Asset Management (Hong Kong) Ltd. chafed at IMR-A's criticism of his firm's use of W. I. Carr as securities brokers. Mr. McEvatt said the quality of Asian brokerages is weak and that shrinks the number of acceptable firms. Indocam uses W.I. Carr, which has lived through difficulties in recent years, for limited services among several other brokerages.
RCP, as well as other rating agencies, did not take into account the "very disciplined and methodical approach" Indocam uses in selecting brokers, he said.
Mr. McEvatt was more sanguine about Indocam's overall rating in the IMR-A study: Beta for investment and AA for business skills. The assessment pointed to Indocam as "one of the best" in Asia, he said.
Three firms on the list are rated as "suspended," indicating some internal development that makes the firm temporarily impossible to rate. Ki Pacific Asset Management Inc. and Rothschild Asset Management Asia Pacific Ltd. both lost key personnel recently, as did Kerry Investment Management Ltd., the latter because one of its investment directors was found in breach of local compliance rules and dismissed in 1996.
More exacting now
Mr. Norman said RCP & Partners is far more exacting in its scrutiny of subjects today than when it made its debut. More attention is given to issues of compliance, daily methodology, back-office procedures, internal and external audits and software updates as well as on the investment process.
"We look at internal memoranda on company visits, copies of compliance manuals. In terms of due diligence on firms in questions, it's gone about as far as we can go," he said.
RCP & Partners continues to advance its concern for high standards of excellence. It recently launched a performance standard committee based in Europe and has enlisted the cooperation of industry representatives and service providers to set up internationally accepted performance presentation standards for "alternative asset managers" - that is, managers of hedge funds, commodity trading advisers and others.
The committee met for the first time in September in Geneva. Its aim is to have published by the end of 1998 a first paper on performance presentation standards in the industry.