Do ratings houses still make the big calls?

Ratings industry veteran Stephen van Eyk is instinctively opposed to the pay for ratings or ‘supply side’ model employed by some ratings houses, but he sees value in ratings houses not just talking the talk but walking the walk.

van Eyk, the founder of what was once the market-leading Australian ratings house, van Eyk Research, is proud of the fact that the business operated a ‘demand-side’ business model which ensured no money was received from the fund managers the firm chose to rate.

But van Eyk Research ultimately did walk the walk by moving into funds management and running a fund of funds – something which he maintains showed that the firm was prepared to do more than just offer ratings and advice; that it was prepared to back its own judgement.

“It enabled us to prove that our calls were as good as we thought they were,” he said.

But van Eyk acknowledges that times have changed and that the circumstances which allowed van Eyk to thrive no longer exist.

The major banks have exited their wealth management/financial planning businesses leaving an industry made up of two large firms – Insignia (IOOF) and AMP Limited, a range of mid-sized licensees and a plethora of smaller players.

By the time financial service licensees cover the relentless cost of regulation there is not a lot left to direct towards paying research houses and investment consultants and, in any case, it is a buyer’s market with five research houses and an equal number of consultancies vying for business.

That is why the semi-retired van Eyk recognises the imperatives that have driven the major research houses to diversify their businesses; to get into consultancy and develop model portfolios.

However, he says that, from what he can tell, the ratings houses are no longer prepared to make the big calls about the market which were a feature of his tenure at the helm of van Eyk Research.

“I don’t see anyone making big calls these days,” van Eyk told Financial Newswire, what I see is them sitting on the sidelines.

That is why he believes that when van Eyk Research began running its fund of funds approach it was essentially backing in its own calls.

“You then either got the money or you didn’t on the basis of those calls,” he said.

As someone who worked with van Eyk Research before its collapse in 2014, SQM Research founder, Louis Christopher says that the company’s approach at that time of running a fund of funds alongside a research business could hold up but it depended on the character of the manager of that business.

“It depends on the character of the manager in terms of how they deal with the temptations which can emerge,” he said.

“There is no perfect solution when it comes to ratings models.”

Stephen van Eyk had parted company with van Eyk Research in 2010, well before its eventual collapse in 2014.