S&P Capital IQ Fund Research, a leading fund grading provider, has launched its first grading methodology to treat passive funds as a separate asset class. The new qualitative methodology will assign a Platinum, Gold or Silver grading to the best passively-managed ETFs and index tracker funds. Actively-managed ETFs will be graded under the long-standing active fund grading methodology.

S&P Capital IQ believes the growth of low cost passive strategies within Europe will accelerate as wealth managers and independent financial advisers include them in client portfolios. This trend is likely to be reinforced by regulatory changes expected in 2013.

S&P Capital IQ Fund Research will compare passive funds using historic tracking errors, charges - and the culture and experience of the teams managing the funds. However, the most important part of the research will concentrate on the process: In particular, it will focus on how groups try to add return to offset fees and expenses, and on the assessment of the inherent operational risks. The attributes of the underlying indices will also be considered, including liquidity and replicability.

Kate Hollis, Director, Fund Research, S&P Capital IQ: “We are seeing a massive upsurge of interest in passive funds.  Low cost beta propositions, with low or no management fees are becoming a reality.

In the run-up to UK Retail Distribution Review (RDR), established players and new providers alike have introduced plain vanilla low-cost tracker funds reinforcing extreme competitive pressures.

We believe the best way to determine which passive funds can achieve a grading, i.e. which funds have achieved their objectives in the past and are likely to achieve them in future, is by combining the quantifiable, such as the costs and historic track record, with the qualitative or the way in which performance has been achieved and the people and processes involved.

Investors continue to seek greater confidence and transparency in their investments. We are therefore delighted to offer this new grading service that will provide best in-class knowledge for portfolio selection.”

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