Defaqto launches rating system for newer funds and portfolios

Defaqto has launched a new rating system designed to help advisers assess funds and portfolios that are yet to build up an established track record.

The Defaqto Foundation Rating will be available to funds and portfolios from launch for their first five years of operation.

It aims to provide an independent assessment during the earlier stages of their development.

The rating system is the first to combine Defaqto and RSMR capabilities, after Defaqto acquired the fund ratings and research business in 2024.

Defaqto stated that newer funds and portfolios can be more difficult for advisers and fund selectors to assess, as they do not have the performance history of established investment solutions.

Its Foundation Rating has been designed to assess the potential opportunities newer funds can offer.

“There is a clear gap in the market when it comes to newer funds and portfolios that don't yet have an established performance track record,” said Defaqto head of insight, Andy Parsons.

“The Foundation Rating allows us to look beyond the performance history that simply doesn’t exist at this stage.

“By combining Defaqto’s structured quantitative assessment with RSMR’s qualitative research and due diligence expertise, we can give advisers another independent source of information when they are considering a newer proposition.

“It is also an important demonstration of what bringing Defaqto and RSMR together can deliver. We are combining two different but complementary approaches to investment research to address a genuine gap in the market.”

The assessment begins with the asset manager providing information, which is evaluated using Defaqto’s scoring methodology.

This is combined with qualitative appraisal from RSMR, drawing on its existing due diligence of asset management groups.

Factors that can support the future success of a fund or portfolio are considered, including the experience and stability of the investment team, investment processes, systems and controls.

The system operates on a pass/fail basis and, for those more than a year old, the fund or portfolio performance history is gradually incorporated into the assessment.

“There has always been something of a chicken-and-egg situation with newer funds,” said RSMR head of research, Stuart Ryan.

“Investors naturally look for evidence such as track record and scale, but a fund has to attract investment in the first place to reach those milestones.

“We regularly speak to asset managers with new strategies that they are trying to establish. Our role isn’t to predict that a new fund will succeed, because there are never any guarantees.

“What we can do is use our experience and due diligence to assess whether the right foundations are in place, looking at the people behind it, their experience, the investment process and the wider asset management business.

“Newer funds can also give investors access to new investment strategies and ideas at an earlier stage. The Foundation Rating provides an independent assessment to help advisers understand those propositions before a longer track record has been established.”

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