Morningstar, CIFSC extend olive branch

Although fund researcher Morningstar withdrew from the Canadian Investment Funds Standards Committee in February, citing its dysfunctional nature, it seems the split between the two organizations could still be reconciled.

Both sides continue to talk, at least informally. And recently, at the behest of Morningstar president Scott Mackenzie, the two sides agreed to sit down later this week to get a better understanding of how the CIFSC has changed since Morningstar’s departure.

“What we were left with at the last go around with people at IFIC was that we were being told that there have been some significant changes there and I would like to see what those changes are,” says Mackenzie.

Despite this quiet diplomacy, the fight for public support continues as both sides want to be seen as the industry standard. Earlier this week, Morningstar’s Rudy Luukko mildly rebuked the committee noting that “there has been a shift in the balance of power within CIFSC, with fund companies and their trade group taking on a greater role in developing categories.”

Arguably, the addition of Lipper, the U.S. fund rating agency, to the CIFSC eases that concern. By all accounts, the arrival of Lipper is a welcome change for the CIFSC. A little more than three years ago Lipper was invited to join the committee. But back then, Mackenzie was concerned because some of the exiting members of the committee were reluctant to allow Lipper in. “At that time they [Lipper] were telling us they were coming to Canada in some fashion so why wouldn’t you have it on there,” he recalls from his experience at the time.

After that meeting Lipper was invited to join the committee, but their membership was revoked later that year when they failed to show up for a single meeting or participate in a single conference call.

Jed McKnight, head of North American research at Lipper, explains this blemish on the company’s record. He notes that Lipper’s strategic plan at this time shifted the company’s attention away from Canada to concentrate on expansion in Europe. This time, he adds, Lipper has every intention to stay in Canada.

Despite the arrival of a new competitor, Mackenzie’s attitude towards Lipper is same as it was three years ago. “Lipper is a logical member of the group,” he says.

Ralf Hensel, the CIFSC’s chair and IFIC’s senior legal counsel, is also excited to have Lipper on board.

Lipper has already improved on its past attendance record. McKnight made a trip up with a member of his sales team to attend the June meeting of the CIFSC. “It’s nice to be able to come together with a group of other vendors and talk about creating standardized classifications,” he says of his first committee meeting. Standard categories, he adds simplifies things for investors to be able to compare classifications.

Lipper didn’t waste any time jumping into the fray, Hensel says. “They were very involved and very engaged,” he says. “They’ve given us some very good ideas already about some things that we might think about doing in the future.”

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While Morningstar and Hensel waded in on the impact they expect Lipper will have on the CIFSC, McKnight steered clear of questions about the emergence of competing standards in Canada.

Both category structures will soon be in place. The new categories developed by the CIFSC will take effect as of the July 31 reporting period. Morningstar, meanwhile, recently completed its first comment process, receiving about a dozen formal responses.

One of the criticisms has been concern that some of Morningstar’s categories won’t have enough constituent funds to be useful while others applauded the researcher’s efforts to construct comprehensive new categories.

Mackenzie hopes to have a revised version of Morningstar’s fund categories out in August that will have a secondary comment period. In this round, all the funds would be placed in categories. “The feedback then would be: Do you feel you’ve been properly categorized.”

But if Morningstar does decide to return to the CIFSC, none of their changes would be combined with the committee’s new fund classifications, at least not in the short term. “It would be too late for us to make changes,” says Hensel.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(07/18/06)