Regulatory Guidelines Funds Research

Introduction

Zenith Investment Partners (“Zenith”) provides the following guidelines on Zenith’s processes and procedures relating to research services, research methodologies and conflict of interest management. This information also addresses Zenith’s obligations relating to regulatory guidance as specified by the Australian Securities & Investments Commission (ASIC). In particular, this document deals with Zenith’s obligations as defined by Regulatory Guide 79 and other regulatory guidelines and the Corporations Act.

Financial Services Guide

Zenith Investment Partners Financial Services Guide can be located here: Financial Services Guide.

Privacy Policy

Zenith Investment Partners Privacy Policy can be located here: Privacy Policy.

Services and Expertise

Zenith was formed as a Research House specialising in managed funds research in 2003 and is the holder of Australian Financial Services License (AFSL) No. 226872. Zenith is 100% owned by Directors and Senior Management and accordingly has no institutional ownership.

Zenith currently has a dedicated team of 11 full time analysts, 2 quantitative analysts, 2 portfolio specialists and additional analytical resources amongst the wider team that can be brought to bear as needed. Organisational structure is as follows:

Zenith organisation chart.

All Zenith analysts and senior personnel at minimum meet the general standards of competency required for AFSL holders as set out in ASIC Regulatory Guide 146 Licensing: Training of financial product advisers. RG 146 is a guide for Australian financial services licensees and representatives who provide financial product advice to retail clients. In addition, all analysts also have academic qualifications to degree level at minimum. Further details on Zenith staff can be found on the People pageFurther details on Zenith staff can be found on the People page at https://www.zenithpartners.com.au/People of Zenith’s website.

Funds Research

Scope of Ratings

Zenith's ratings and research reports are limited to “General Advice” (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product. It is not a specific recommendation to purchase, sell or hold the relevant product(s) and does not have regard to the particular circumstances or needs of any specific person who may read it. Zenith advises that individual investors should seek their own independent financial advice before making an investment decision. No part of any research report is a solicitation to buy or sell any investment. Research reports are prepared exclusively for clients of Zenith.

Ratings are specific to the product to which it is issued. That is, Zenith rates products rather than fund managers. Zenith believes that while the skill of the investment management and strength of the organisation is paramount, product design features can differ even within the same investment strategy and so we do not see manager ratings as an effective way to capture these aspects.

Research Philosophy

Zenith's research process is fundamentally driven with a strong bias toward researching for quality rather than seeking to provide voluminous coverage of the entire marketplace. Zenith sees itself as a high conviction researcher and is determined to focus our research effort on illuminating those products with merit rather than undertaking in-depth research on all funds (see Coverage Policy).

Coverage Policy

Zenith’s coverage policy defines the investment universe of products which are potentially eligible to receive an investment rating. This universe primarily focuses on those products available to financial advisers via the major wrap platforms and master trusts. Products predominantly encompass Unlisted Managed Funds and Exchange Traded Products (ETP's) available via the ASX.

Zenith also includes in its coverage policy products in several asset classes which are traditionally only available directly ‘off-platform’ via a Product Disclosure Statement or Information Memorandum. These asset classes which have limited or nil platform availability include sectors such as Unlisted Direct Property Funds and products in the Alternatives asset class including Hedge Funds and Private Equity Funds.

Zenith regards research coverage based around platforms to be most efficient for the majority of asset classes as anecdotal evidence suggests that approximately 85% of adviser driven fund flows utilise platform products. It should be appreciated however that there is still a potentially large number of funds off-platform that are not being captured in the Zenith universe.

Funds in the investment universe may be divided into ‘Parent’ or ‘Sibling’ funds. This denomination relates to whether a fund is structured for a particular investment platform or not. Parent funds may have multiple sibling funds on one or more platforms. Sibling funds are identical to the parent with the exception of costs. At present Zenith’s total investment universe represents in excess of 1,300 Parent funds (over 3,000 including Sibling funds) and is viewable on the Fund ReportsFund Reports page at https://www.zenithpartners.com.au/FundsResearch/FundReports on the Zenith website.

Zenith's investment universe is predominantly made up of products which are open to investment. A small number of products however may periodically be closed to investment or utilise a closed end structure (a limited investment window followed by a fixed investment term). Such products are included for performance monitoring purposes. Products in this category are typically those with ‘Real Assets’ such as real estate or direct ownership of commodities as well as Private Equity funds.

It is important to note that the coverage policy only dictates how the investment universe is compiled and maintained, not how Zenith ratings are assigned and distributed across the investment universe. Zenith does not seek to apply any selection bias within the coverage policy outside the availability requirements listed above. Removal from the investment universe will only occur when a product is terminated and wound up or the minimum requirements regarding information availability cannot be met (see below).

Research Schedule

Research coverage is predominantly undertaken on a sector basis (asset class) which operates on an annual cycle. Zenith’s research objective is to ensure coverage is formally updated as close to every 12 months as possible. Zenith has the ability to undertake research outside the scheduled cycle when required ('Out-of-Cycle' reviews). Out-of-cycle reviews are at Zenith's discretion and generally only considered where there is either strong client demand or the product is a new offering with compelling attributes. Out-of-cycle reviews are undertaken in accordance with our standard research process.

The exception to the standard research schedule is where funds have adopted a closed-ended structure (as defined above). Given that such funds typically have a comparatively short timeframe in which to raise capital, Zenith will undertake the research process as and when such products are offered to the market.

Research Process

Zenith's research process is fundamentally forward looking and relies on both qualitative and quantitative input from analysts. The research methodology is divided into two key processes.

Research Process.
1. Compile sector universe
2. Conduct preliminary screening
3. Successful candidates issued research agreement
4. If agreement executed, formal due diligence conducted
8. Report finalised
7. Draft report issued to manager for fact checking (without rating)
6. Results submitted to Zenith Research Committee for ratification
5. Draft report prepared and peer reviewed
9. Zenith subscriber clients notified of rating
10. Fund Manager notified of rating
11. Ongoing surveillance and data collection
12. Annual review cycle (back to #1.)

1. Sector Universe and Preliminary Screening

Zenith's sector universe is derived from its coverage policy. Zenith maintains propriety in-house data on products which form the basis of our investment universe. This data is collected directly from fund managers and product issuers on a monthly basis. This data (and calculated financial ratios) forms the basis of Zenith’s quantitative analysis process.

Screening is undertaken on a sector basis which are typically categorised along asset class and regional lines. The following table shows the relevant peer groups in Zenith’s coverage universe. These groups are defined by common asset classes, objectives, investment styles and investment structures.

Asset Class
Alternatives Australian Fixed Interest Australian Shares Cash International Fixed Interest
Peer Group (Sub Asset Class)
Agribusiness Bonds All Cap CMT Bonds
Debt Strategies Corporate Debt Equity Income Enhanced Corporate Debt
Exchange Traded Fund - ETF Exchange Traded Fund - ETF Exchange Traded Fund - ETF Exchange Traded Fund - ETF Diversified
Fixed Income Listed Investment Companies - LICs Geared Other Exchange Traded Fund - ETF
Fund of Hedge Funds Specialist Industrials High Income
Global Macro/Absolute Return Large Companies Specialist
Investment Bonds Listed Investment Companies - LICs Unconstrained
Listed Investment Companies - LICs Long Short
Managed Futures Micro Cap Companies
Market Neutral Mid Cap Companies
Multi Strategy Resources
Other Small Companies
Private Equity Specialist
Asset Class
International Shares Mortgages Multi-Asset Property Retirement Products
Peer Group (Sub Asset Class)
Asian Long Short Conservative Agribusiness Australian Securities Fixed Term Annuity
Country Funds High Yield Balanced Direct Lifetime Annuity
Emerging Markets Specialist Exchange Traded Fund - ETF Diversified Other
Exchange Traded Fund - ETF Growth Exchange Traded Fund - ETF Protection Products
Global (Hedged) High Growth Global Securities Variable Annuity
Global (Unhedged) Income Listed Investment Companies - LICs
Global Long Short Lifestage Super Specialist
Listed Commodities Lifestage Super
Listed Infrastructure Listed Investment Companies - LICs
Listed Investment Companies - LICs Moderate
Regional - ASIA EX-JAPAN Real Return
Small Companies Specialist
Specialist
Specialist - Long Short

All open products within the universe are subject to the review process with review schedules carried out annually. Each product undergoes a preliminary screening process to determine those candidates which have a strong probability of achieving at least an Investment Grade rating or higher.

The preliminary screening involves a comprehensive, multi-dimensional selection process using quantitative analysis with a qualitative overlay. Only products that pass the preliminary screening become eligible to undertake Zenith’s full research process (a Product Assessment). Products that do not pass are ineligible to undertake a Zenith Product Assessment as they have failed to meet the necessary quality parameters. These products which fail the preliminary screening are deemed to be Non-Investment Grade for Zenith clients (refer to Zenith ratings definitions Zenith ratings definitionsZenith ratings definitions at https://www.zenithpartners.com.au#RATINGSDEFINITIONS for further information).

Factual information on these products and their rating status remains visible to Zenith clients until the next annual review when they will again be screened for potential eligibility for a Product Assessment. It is important to note that every product in the universe is screened annually with the presence of an existing rating no guarantee that a product will not be downgraded during the annual review.

2. Full Due Diligence Review & Rating

Once a product has been confirmed as passing the preliminary screening process, the product issuer is invited to participate in the formal review process. Once Zenith’s Research Agreement is executed, product issuers are contractually committed to the research process and will be issued a Research Rating regardless of the ultimate outcome. This rating will remain valid until the earlier of either:

  1. The rating being updated by Zenith (expected annually in accordance with our scheduled Sector Reviews); or
  2. The rating is withdrawn.

Once a rating is issued it will remain available for viewing on the Zenith website until it is replaced, updated or withdrawn (see ‘Currency of Ratings’ below).

The full due diligence review involves a formal face-to-face meeting with the investment management team and other key management figures to assess the product. These meetings typically take several hours and examine all aspects of the product’s objectives, structure and operation. It is at this stage of the process where Zenith probes deeply to understand all the nuances of the investment manager from its overall philosophy and process to the quality, experience and track record of the investment team. Zenith also undertakes a thorough review of all documentation and an in-depth "look under the covers" with respect to the investment portfolio and management systems.

For comparison purposes, managers are reviewed amongst both their peers within their sector, but also importantly with other managers of the same style. The research team consider factors which could impede attractively ranked products from repeating strong returns generated in the past. Examples include organisational issues or major staff changes.

Once this due diligence has been finalised, a formal research report is completed and a rating is assigned. Managers are permitted access to a copy of the draft research report (generated as a .pdf file to prevent editing), to identify any factual errors. It is important to note that Zenith retains editorial control at all times and draft reports do not carry a rating.

Once a report is finalised, the rating is assigned and the report published to the Zenith website. Each time a report (or suite of reports) is published, Zenith sends out a communication notifying clients that new research and ratings are available. Only after communicating this information to subscribing clients are product issuers informed of the outcome of the ratings process.

Ratings Methodology

Zenith utilises both quantitative and qualitative factors in its ratings models. Models maximise commonality across different asset classes while retaining flexibility for specialist asset classes and strategies.

The quantitative assessment is flexible in that we do not rely on a set minimum performance history to positively rate a product. Zenith may at its discretion use the history of an investment manager at a previous organisation if required. However it should be noted that lack of performance history is generally an impediment to conviction and will usually negatively impact on our scoring.

Zenith’s ratings are based on the output of a proprietary scoring model. This model and its broad factors are shown in the following diagram. Please note we do not disclose the weightings of factors and sub-factors may change for each sector. This information should be used as a guide only.

Ratings Methodology.
Organisation
  • Manager Profitability
  • Distributor Profitability
  • Strategy Profitability
  • Corporate Stability
  • Long Term Commitment to Strategy
Investment Team
  • Depth
  • Structure
  • Experience & Expertise
  • Stability
  • Culture
  • Track Record
Portfolio Managment
  • Experience
  • Expertise
  • Track Record
Investment Process
  • Investment Philosophy
  • Universe Filter
  • Quantitative / Valuation Analysis
  • Transitory / Qualitative Analysis
Portfolio Construction
  • Decision Process
  • Weightings Process
  • Buy / Sell Discipline
Risk Management
  • Risk Management Culture
  • Risk Management Constraints
  • Risk Management Systems / Models
Product Structure
  • Investment Objective
  • Attraction within Portfolios
  • Fees

Ratings Definitions

Rating Description
HIGHLY RECOMMENDED HIGHLY RECOMMENDED Only a small number of funds achieve a Highly Recommended rating. These products typically rate first quartile on each of the following criteria - investment personnel, security selection, portfolio construction, risk management, organisational strength, risk adjusted performance and product features.
RECOMMENDED RECOMMENDED Recommended products are deemed strong investments within their respective asset class, typically rating first quartile on most criteria.
APPROVED APPROVED Approved products are deemed above investment grade investments within their respective asset class. Approved candidates typically rate above the median on most of the assessed criteria.
UNDER REVIEW UNDER REVIEW The fund rating has temporarily been placed under review due to qualitative and/or quantitative issues that need to be addressed by the Zenith Research Team.
REDEEM REDEEM A redeem rating will be placed on a product where: Zenith has downgraded the rating to below investment grade through a lowered conviction in the product or; where a significant event adversely impacts the product to such an extent that investors are advised to redeem their investment.
NOT RATED - DECLINED NOT RATED - DECLINED No previous rating held. The fund has passed Zenith’s preliminary screen however the issuer has declined to participate in a full due diligence review.
NOT RATED - WITHDRAWN NOT RATED - WITHDRAWN Previous Zenith rating withdrawn 1 due to the issuer electing to cease ongoing coverage, or the fund has been terminated and wound up.
NOT RATED – SCREENED OUT NOT RATED – SCREENED OUT No previous rating held. The fund has either passed Zenith’s preliminary screen but failed the full due diligence process; failed Zenith’s preliminary screen making it ineligible for a full due diligence review; or is yet to be included in Zenith’s preliminary screen or sector review process.
1 Instances where the issuer has elected to cease ongoing coverage can be viewed on the relevant fund page of Zenith’s website.

Zenith ratings should generally be interpreted as a measure of Zenith’s conviction in a products quality and management’s ability to deliver their stated objective as well as a measure against sector group peers. Specifically, each rating is relative to its own peer group (sector). However it must be appreciated that Zenith’s ratings do not address asset class selection or portfolio construction and as such ratings should not be used in isolation.

It must also be appreciated that Zenith’s ratings cannot be accurately compared with that of other Research providers owing to differences in research methodologies and approach to coverage. Any comparisons between ratings from different research providers are at the users own risk.

Absolute Risk Ratings

The Absolute risk rankings should be viewed as a guide to potential capital volatility (in both gains and losses) of the relevant investment strategy (Zenith Asset Class / Sub Asset Class classification) of this product. A number of factors have been considered in setting this risk level. For liquid asset classes, we have typically used the underlying historical return volatility of the product’s benchmark if the benchmark is a reasonable proxy for returns for this strategy. Where the risk of an investment cannot be reasonably estimated by historical benchmark return analysis, we have made a qualitative assessment of absolute risk and considered factors such as illiquidity risk, transparency, strategy risk, operational risk etc.

Very High Very High.
Funds classified as Very High risk are exposed to sectors with very high historical absolute volatility (16+% p.a. plus standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Very High absolute risk level.
High High.
Funds classified as High risk are exposed to sectors with high historical absolute volatility (8-16% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a High absolute risk level.
Moderate Moderate.
Funds classified as Moderate risk are exposed to sectors with moderate historical absolute volatility (4-8% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Moderate absolute risk level.
Low Low.
Funds classified as Low risk are exposed to sectors with low historical absolute volatility (2-4% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Low absolute risk level.
Very Low Very Low.
Funds classified as Very Low risk are exposed to sectors with very low historical absolute volatility (< 2% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Very Low absolute risk level.

Relative Risk Rating

The relative risk rankings should be viewed as a guide to the relative risk of a product within its sector. The relative risk levels are listed from highest to lowest and are intended to provide some insight into the potential divergence of the investment’s return profile relative to its assigned benchmark.

Zenith Rating Distribution

Data on Zenith’s ratings distribution is updated dynamically. Accordingly, the distribution of Zenith’s ratings as shown below is current as at the date of viewing. Users can view this distribution using the following fields:

  • Asset class: or
  • Sub-asset class.

This data is drawn from the whole of Zenith’s investment universe. Default view is all Parent funds across all asset classes.

Zenith Rating Distribution Chart As At: 26/07/2016
Ratings Distribution Chart

Currency of Ratings

Each Zenith Product Assessment and rating is marked with the date it is issued. Product ratings remain valid until they are updated, replaced or withdrawn. Ratings will generally be updated annually according to the relevant sector review cycle. Detailed information on ratings changes and any instances where managers have withdrawn from the ratings process can be found either on the individual fund pages or within the relevant Sector Reviews, both available on the Zenith website.

Withdrawals of ratings by Zenith may only occur under the following circumstances, where either;

  1. The Fund rating is downgraded to below Investment Grade;
  2. the Manager elects to cease ongoing coverage;
  3. the Manager closes the Fund to applications; or
  4. the Fund is terminated and wound up.

Managers electing to cease coverage of a product can only do so where a new Research Agreement for ongoing coverage has been issued by Zenith and subsequently declined by the Manager. Once a Research Agreement is entered into, it is binding and irreversible and will result in a Zenith rating being issued regardless of outcome.

Given the dynamic nature of the industry, changes relating to fund managers business operations, personnel or processes may occur at any time. Accordingly, Zenith’s ratings are subject to change without notice and can occur at any time outside the scheduled annual review cycle. Clients must ensure that they check the currency of a Product Assessment and rating on Zenith’s website to ensure it remains valid.

Conflicts of Interest Policy

Zenith Investment Partners Conflicts of Interest Policies can be located here: Conflicts of Interest Policies.