RCP & Partners, Geneva and Hong Kong, soon will unveil a set of ratings designed to help institutional and private investors evaluate the business acumen of investment managers in Asia.
The company will publish its first batch of completed ratings by spring; it so far has interviewed more than 50 firms and plans to bring that number to 75 to 80 by the end of 1996.
So far, RCP has rated about 23 firms; it will not reveal what scores each firm received.
The financial management firm has interviewed and is in the process of rating Jardine Fleming Investment Management Ltd., HSBC Asset Management Hong Kong Ltd. and Schroders Asia Ltd., all based in Hong Kong, before the first publication of their results. The firm hopes inclusion of these large institutions will help RCP's fiduciary rating system establish credibility.
Analyzing results, Shane H. Norman, managing director with RCP in Hong Kong, observed "a wide variety of investment styles (hedge, overlay, value growth, fixed income, etc.) and considerable depth of expertise. The most notable weaknesses have tended to be a lack of credible risk controls and weak separation of conflicting businesses, (such as where a fund manager is part of a business which also includes deposit-taking, corporate finance and/or stockbroking). These weaknesses are not general, of course, but (are applicable) to certain firms."
RCP officials see their rating system as filling a void. While other methods now available measure only investment performance, RCP has designed a system to assess business management proficiency as well. Its aim is provide more protection for institutional and private investors than currently exists.
"Unlike banks and insurers, an investment manager can just open up shop without regulation," noted Robert Pouliot, managing director with RCP in Geneva.
A former bank regulator, Mr. Pouliot said "many investment managers have collapsed, but regulators and the industry have no vested interest in making these known....as long as the stock market rises, investors don't give a damn."
The recent downfall of London-based Baring Securities was an example of how regulation showed itself inadequate, and the regulators in Singapore and the United Kingdom seemed at odds in resolving a shared dilemma, Mr. Pouliot said. The firm maintains more scrutiny is particularly needed now, when pension funds in the West are experiencing decreasing contributions and funds are looking for more risk to improve their returns on investment.
Rothschild Asset Management Asia Pacific Ltd. in Hong Kong was one of the managers to submit to the RCP fiduciary rating system. Managing Director Martin Ash called the RCP team "very thorough in assessment." The team interviewed in detail five staffers representing different areas of the organization. They debated a number of issues with Rothschild's staffers concerning its investment process' strengths and weaknesses, and the constitution of its staff. Mr. Ash reported the interviewers had concerns over the firm's mix of expatriate and local fund management staff.
RCP inquired about Rothschild Asset's independence from its parent and how it deals with client deposits. Mr. Ash acknowledged clients have allowed Rothschild to deposit money with its parent bank.
"We may look at that more closely now; it may be that 100% (of client deposits) may go to third-party banks," he said.
Rothschild scored "beta," or very good, for quality of its investment performance on a scale using the Greek letters alpha through lambda. The firm rated an "A+," or good, for business management on the scale, in which the highest rating is AAA+. While Mr. Ash was disappointed not to have gotten a top rating, he called the assessment "fair."
None of those interviewed so far has managed to achieve top ratings under the RCP measurement system, called the Investment Management Report-Asia. Mr. Norman said his team was deliberately tough because it is attempting to establish its reputation.
One fund manager was not happy with the results of the examination. RCP initially scrutinized Regent Fund Management in the spring, upgrading it after a second look in May. But in September, RCP downgraded Regent slightly for an alleged conflict of interests.
Regent's Managing Director Peter Everington said the raters' reasoning was "completely flawed."
Regent Pacific invests in closed-end funds that trade at a discount to net asset value for the purpose of wresting control and forcing the funds to open so investors can exploit their assets. Regent was downgraded because it invested in the GT Chile Growth Fund at the same time its London affiliate, Regent Kingpin, was trying to acquire the management contract of that fund. RCP objected to the fact that Regent Pacific delayed telling its shareholders of Regent Kingpin's attempt to win control.
But Mr. Everington pointed out that a certain level of stealth is essential in Regent Pacific's line of business. Regent Pacific's stake had been fully hedged, he said, and the money used for this exercise was not mutual fund or pension fund assets, but rather money earmarked for aggressive activity.
The IMR-A universe includes firms well-known in Asia, especially in Hong Kong: HSBC Asset Management Hong Kong Ltd.; Jardine Fleming Investment Management Ltd.; Dao Heng Fund Management Ltd.; AIG Investment Corp., as well as the investment managing arms of institutions such as Schroders, Barclays de Zoete Wedd Investment Management (Hong Kong) Ltd., Fidelity Investment Management (Hong Kong) Ltd., Nomura Trust (Cayman) Ltd. and Aetna Investment Management (Hong Kong) Ltd.
Messrs. Pouliot and Norman are adamant that investment performance is a misleading and inadequate way to select an investment manager because past performance is no guarantee for the future. The two said fund statistics published to rate investment managers' prowess record only those managers entrusted with public funds, ignoring consultants from newer or small firms.
Furthermore, investment managers often fail in their business proficiency, tending to be commercially static and vulnerable to takeovers. According to Mr. Norman, this is the reason for many takeovers in the United States.
RCP enlisted the services of the WM Co. PLC, Edinburgh, Scotland, to assess the investment performance of the firms being scrutinized.
Why did RCP launch this rating service in Hong Kong and Singapore rather than in its home territory, Europe, or in the United States?
Investors in the West have concerns about private money in Asia because so much investment capital has been amassed in the region over such a short period of time, Mr. Pouliot said. He was approached by Swiss investors Bearbull SA to research the quality of Asian-based fund managers. From that first query came the method they designed and are still perfecting (see story, page XX). They believe their method will become a rating standard for the industry.
Eventually, the IMR-A rating should increase visibility in the way investment managers do their jobs. The ratings also should generate "a more diffuse flow of investment to younger and newer managers, not just the top 10," said Mr. Norman.
Performance ratings will be published monthly, the full IMR-A universe quarterly, and full due diligence reports yearly. The firms already screened did not pay for the assessment, but eventually RCP will require a fee. A subscription to the IMR-A will cost $15,000. The rating firm expects to begin publishing country risk profiles in 1996.
Investment managers in Switzerland, France and the United Kingdom will be the next to submit to this fiduciary rating system in the next six to 12 months. "Otherwise someone else will do it ahead of us," said Mr. Norman. Ratings in the United States will follow much later.