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Fitch rejigs manager ratings methodology

Fitch Ratings has rethought its methodology for rating and reviewing real estate asset managers. The original real estate asset manager methodology was based closely on Fitch’s general asset manager methodology, and this was also changed, in May 2007.

Roger Schneider, an analyst with Fitch in Frankfurt

Roger Schneider, Fitch: up to date

"Fitch regularly updates its methodology as part of its quality management," says Roger Schneider, an analyst with Fitch in Frankfurt. "There was no specific driver for coming out now. However, we feel that we are very much up to date with some recent developments in the industry." Schneider points to the increase in market participants, heightened complexity and calls for greater transparency as examples of those recent developments. The improved methodology, it is hoped, will make it easier to find differentiating factors between managers.

Notable changes in the new methodology include a shift in the weighting given to the various criteria. Previously, Fitch had assessed a manager’s investment process, that criterion has now been split in two. Investment selection and portfolio management are now separate criteria, with a combined weighting of 45% of the ratings decision. Conversely, a number of previous criteria – reporting, evaluation and technological resources among them – have been grouped under the category of investment administration, with a weighting of just 15%. Tellingly, given the seemingly endless problem of talent retention, an entirely new criterion is staffing. "Staffing is of key importance to any asset management organization," says Schneider.

The ratings are issued according to a five-tier ranking, with REM 1 being the highest rating and REM 5 the lowest. The majority of the ratings are expected to be within the REM 2 and REM 3 tiers. This assumption is based on the previous methodology, in which a similar scale of rating was used.

Only one fund was rated in the top tier – Capital International for its European-based investment operations in London and Geneva – and most of those that would fall below the third tier did not opt for a public rating. Although Fitch would like to encourage these lower-tier funds to go public under the new methodology, it expects the range of ratings to generally fall within the top three tiers.

It’s early days, though. Only two real estate asset managers have so far been rated. SEB Immobilien in Germany is rated REM 2, while FIMIT SGR in Italy will have its new rating announced shortly. But Schneider for one expects to be very busy in the near future. "When the original real estate asset manager rating methodology was launched in 2005, the German market was in crisis," he says. "Interest was somewhat muted due to the methodology requiring a high preparedness for transparency. Now that this particular crisis is over, as demonstrated by continuous inflows into open real estate funds over the last 12 months, we expect renewed interest by real estate asset managers in such an assessment."