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Rating:S&P to Revamp the Way it Looks at Funds Not Rated 5.0 Email Routing List Email & Route  Print Print
Monday, June 30, 2003

S&P to Revamp the Way it Looks at Funds

by: Sean Hanna, Editor in Chief

Standard & Poor's is shaking up the way it evaluates funds. Rather than just relying on the track record created by the fund's historical performance, the New York-based fund tracker will employ security level analysis of the funds holdings.

To accomplish this task, S&P will rely on its existing coverage of 1,200 stocks in the United States. Its analysts now provide "buy-hold-sell" ratings on those stocks as part of its STARS rankings.

Sanford Bragg, Standard & Poor's executive managing director, explained that the new methodology for will allow for "a clearer, deeper look into the quality and price appreciation potential of the securities that a fund holds - paving the way for more informed investment decisions in the fund marketplace."

No other fund tracker incorporates security specific analysis into its fund evaluations. One of the major hurdles is knowing what stocks are held in a fund as funds are only required to release individual stock holdings two times per year. Still, S&P claims that it has complete holdings information on over 95 percent of the domestic equity mutual funds it tracks. It adds that the average age of that data is just two months.

To do this level of analysis, S&P will rely on its existing team of equity analysts. While officials at the firm said that they are currently in the initial stages of developing this new methodology, they expect to complete research on funds as early as this summer. At that time S&P plans to integrate that research into its funds research and investment analysis platforms.

The new methodology calls for analysts to determine the price appreciation potential of a mutual fund by aligning a stock's equity "STARS" ranking with the holdings information in the S&P mutual fund database. Then growth and stability of the earnings and dividends of each of the fund's holdings are taken into account by considering the stock's Standard & Poor's Earnings and Dividends Ranking (Quality Ranking), as well as the fund's standard deviation and turnover ratio. Standard & Poor's said it then intends to run a series of regression calculations to determine the price appreciation potential of the mutual fund - one that correlates strongly to the quality of its underlying holdings.

"While Standard & Poor's is still assessing the merits of combining stock research with mutual fund holdings, the proven track record of our equity STARS leads us to believe that our efforts will contribute to more meaningful mutual fund research," explains Phil Edwards, managing director of Funds Research. "Combined with Standard & Poor's existing fundamental analysis of a fund's management team, investment disciplines and track record, this new component of the analysis is extremely interesting, and should provide some exciting results."  

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