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Welcome To SQM Research's Fortnightly
Ratings Update!
An Intro With Managing Director, Louis Christopher
Welcome to our inaugural newsletter for our financial planner and adviser subscriber base, as well as our fund managers.
Each fortnight we will be providing you with updates from our side with regards to fund ratings, market outlook and other interesting news. We plan to make this a down to earth, yet insightful update.
And we will be pulling no punches!
Our goal is to have our subscribers invest and help their clients invest in the best funds, in turn making great returns for their clients, while at the same time, minimizing losses. I say minimizing as we all know in this game, losses or underperformance will happen from time to time. It all about keeping those occasions far and few between in terms of their length of time and magnitude.
Each year SQM Research covers the following sectors:
- Global Property Securities
- Asian Property securities
- Australian property securities
- Infrastructure securities
- Direct and Hybrid property funds
- Mortgage trusts
- Structured products
That is generally the order we do the sectors in, however we frequently have requests from fund managers to review their fund out of cycle, which we do. On each review we also provide a sector report.
If you log in to our ratings research portal here, you will find all the reports on each fund and sector.
Right now we have been undertaking the Global Property Securities review, Asian Property Securities review and the Infrastructure Securities review. In all there are 11 products involved as part of this review. They include the below: 
Source: SQM Research
There are three funds from two managers this year that decided to opt out of our review process.
They include:
* One Path
* UBS Clarion
* AMP Capital Infrastructure Global Securities Fund
The ratings in each of these funds still currently stand, they will expire on May 31. Thereafter we can no longer recommend an investment in each of these funds.
We are also about to commence the review of four new products; two of them are in the global property securities space, one of them - Structured products and another which is a property ETF. I will have more about these for you in our next update.
So far so good with the current reviews. We are close to completing our main meetings with the global property securities managers. Most teams have remained stable over the course of the past 12 months with their respective funds all outperforming the benchmark and their unrated peers.
However, this problem surrounding hedging has arisen once again on the income side. Thankfully, it is not as bad as the events of 2009/10 where nearly every manager had to cut the distribution. Nevertheless it has popped up again and one wonders whether the benefits of hedging a global product really do outweigh the costs.
Our ratings have taken a neutral view to hedged products for some time. In an optimal world the investor would be given an option to invest in an hedged version or unhedged version of the fund, however the costs involved for providing such an option are high and so not all managers can do this.
An Insight Into Our Rated Funds with our Senior Investment Analyst, Leanne Truong
SQM Research’s Rating Distribution
Source: SQM Research
SQM Research has been in the rating’s business since 2006 and has rated over 250 funds since its operations. As the above chart demonstrates, our ratings distribution is concentrated towards the 3.5 to 4 star ratings, however we have issued ratings as low as 2.5 stars and as high as 4.75 stars.
Global Infrastructure Fund Ratings vs Excess Returns
*At December 2013. Excess returns are based on each funds respective benchmark. Both RARE funds are compared against an absolute return benchmark. Comparisons are made for hedged funds only. Based on net returns.
Source: SQM Research, Bloomberg and data sourced directly via the funds
As SQM Research is embarking on its 2014 Global Infrastructure and Property Securities Funds Sector Review, we thought it would be a great time to show our readers our track record within both sectors. The charts speak for themselves, but we thought we’d further illiterate.
In terms of our Global Infrastructure Securities Fund ratings, we've been right on the mark. Our 4+ star ratings have achieved an excess return (relative to their stated benchmarks) significantly above that of our below 4 star funds and unrated funds based on both a 1-year and 3-year basis. While many may argue this is because a component of our rating is based on past performance, we’d thought we’d show our readers something extra to consider.
Performance of Global Infrastructure Funds Since their Upgrades
*At December 2013. Total absolute return since our ratings upgrades. The Lazard Global Listed Infrastructure Fund was upgraded to 4.5 stars in June 2013, the Macquarie International Infrastructure Securities Fund was upgraded to 4 stars in June 2012, and the Magellan Infrastructure Fund was upgraded to 4 stars in June 2012. Comparisons are made for the hedged funds only. Based on net returns.
Source: SQM Research, Bloomberg and data sourced directly via the funds
Each fund that we’ve upgraded in the infrastructure spectrum has outperformed its respective benchmark since. Industry suggestions of ratings being a lag on performance have been unwarranted!
Our track record within the Global Property Securities Funds Sector has also been impressive as the below chart demonstrates -
*At December 2013. Excess returns are based on each funds respective benchmark. Comparisons are made for hedged funds only. Based on net returns.
Source: SQM Research, Bloomberg and data sourced directly via the funds
The charts also reveal a simple fact. Those who avoid being rated by SQM Research have frequently tended to underperform and potentially should also be avoided in turn.
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