Despite apparent demand for a qualitative fund rating service for the European marketplace, a competitive environment for such a service is only just starting to emerge. Two British fund analysis agencies have set the ball rolling, while continental researchers are developing their expertise.

In the US, rating is a major industry, dominated by firms such as Morningstar, Lipper and Standard & Poor's. Last year's acquisition by Standard & Poor's of UK groups Micropal and Fund Research, respectively the quantitative and qualitative leaders in their field, signalled the start of a move towards international fund ratings for the European market.

Fund Research has now upped the ante by deciding to open up its entire rating system, previously jealously guarded.

Institutions and financial advisers will still be asked to pay for the complete service, but the basic information will now be freely available in the press. The subscription has been brought down to less than £1,000 a year. The aim is to ensure that advisers and consultants use the information more widely. It is a big departure for the group, reflecting the new parent's desire to become a major name in Europe.

There are some who suggest that the ratings service has become devalued. One such is Paul Forsyth, whose own, predominantly offshore, ratings service is now being rolled out. Fund Research rates over 650 of the best performing funds.

The ratings are a combination of quantitative (40% weighting) and qualitative (60%). Continental Portfolios, Forsyth's existing service, rates about 100, of which Forsyth says, we would estimate 40 will be triple-A rated, 30 would be double A and 30 would be A." He adds: "We're certainly not going into the business of rating 500, 600 or 700 funds because we think that dilutes the value of the ratings system. We're saying an AAA rating is really something special."

The two firms adopt a similar methodology. Fund Research captures the top 20% of funds in the 16 sectors it focuses on. Using data from Standard & Poor's Micropal, the qualitative assessment is based on consistency of performance as op-posed to cumulative results over one period. According to SPFR, funds which adhere to disciplined processes and exhibit strong management with continuity are more likely to provide consistently above-average risk-adjusted returns.

The rating bandings are actually quite narrow and should not be over-emphasised, says SPFR's Nigel Slade. "The rating alone is not sufficient to make a choice - you need to look at the process, the team, the investment philosophy and the risk profile of the funds."

Forsyth Partners is meanwhile restyling its Continental Portfolios service and will now offer ratings. Forsyth says, "We are presenting the information in a more dynamic fashion. This is something of a breakthrough as it is the only dedicated service providing formal ratings focused on international offshore funds."

For five years, Forsyth has been offering an offshore fund selection and model portfolio service for advisers and institutions. Fund Ratings & Analysis (FAR) has been developed out of the simple rationale that highlighting the top funds in a sector is not enough; people want to know which funds are the best.

Paul Forsyth comments: "The introduction of FAR results from our interpretation of how investment professionals are using international funds."

FAR places greatest emphasis on funds investing in developed markets. Forsyth has already made its name in providing quality advice on emerging markets funds and publishes separate research material on each region. FAR will feature the following fund sections: Global, American, Emerging Markets, European, Pacific Basin, Bonds.

Forsyth says, "From time to time, we may ascribe ratings to other funds such as UK unit trusts, OEICS and other locally domiciled funds where there is a compelling case and when we are aware that such funds are regularly used by professionals."

Emerging market funds would naturally be more difficult to assess qualitatively. As an indication of how selective Forsyth will be, he says that "of the 150 emerging markets funds covered in our manual, 120 are emerging European and only 20 of those will be rated at all.

"For some, we will say no more than that they are the entry route to a market. Our customers are free to call us for an unofficial assessment of non-rated funds."

Elsewhere in Europe, there are no ratings services as such but performance analysis groups such as Bopp in Switzerland and FERI Trust in Germany offer extensive coverage of these individual markets. FERI Trust carries out a fairly comprehensive review of funds available in Germany.

The 'Fonds Research' service aims to identify the best fund managers and to optimise risk reduction offers guidance on performance analysis and aims to pinpoint comparable funds for a given risk profile. Investments are benchmarked using market indices such as the DAX and MSCI Germany, plus a specially constructed benchmark, the FERI Trust balanced index, for mixed funds."

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