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Interactive Data Adds GlobalRating Group Ratings to Credit Ratings, Conducts Research on Benchmark Indices

Interactive Data Corporation’s Pricing and Reference Data business has added credit ratings from the GlobalRating Group to its Credit Ratings – Emerging Markets service. The vendor has also released the results of its recent quantitative research comparing international mutual funds with relevant benchmark indices.

Anthony Neville, divisional director, Interactive Data (Europe), explains the impact of the addition: ” The service now covers the increasingly important markets of Russia, Kazakhstan, Armenia and Azerbaijan to complement the existing wide range of credit information from many other established contributors.”

Interactive Data’s emerging markets ratings service is a source of credit information for more than 80 emerging market economies, containing over 8,000 issuer ratings from over 35 international and local rating agencies, says the vendor.

The vendor has also announced the results of its quantitative research into international mutual funds and their relation to benchmark indices. According to Interactive Data, statistical analysis revealed that comparing the performance of international mutual funds that use fair value adjustments with their proxy benchmark indices can be misleading if the benchmark indices fail to employ fair value principles.

The study found that if proxy benchmark indices used fair value principles, tracking error, which is a common metric in gauging fund performance, for international mutual funds may be significantly reduced.

These findings are contained in a study conducted by Robert Haddad, senior manager of evaluated services, Interactive Data Pricing and Reference Data. In his research, Haddad reviewed public net asset value (NAV) data from April 2004 to March 2008 for a sample of 166 US mutual funds investing in international equities, each representing a distinct fund family.

As part of the research, he estimated the daily tracking error during this four year period by comparing the returns of these international funds to the returns of a pair of proxy benchmark indices, with one using local closing prices and the other using evaluated prices from Interactive Data’s Fair Value Information Service.

Tracking error estimates the standard deviation of the differences between a mutual fund’s returns versus those of a comparable benchmark index. It is often used by fund managers and investors to gauge a level of risk between mutual funds with similar investment styles, relative to comparable benchmark indices. A higher tracking error is generally associated with a perception of higher relative risk in the fund.

Interactive Data’s findings suggest that if international funds only use benchmark indices that are valued based on local closing prices of international equity securities, an inherent bias toward higher tracking error will persist. This bias is amplified on days with higher market volatility. However, if fair valuation principles are also applied to international benchmark indices, the result is a reduction in tracking error and a more accurate comparison for measuring fund performance.

Haddad comments: “Our research estimates that approximately 93% of international mutual funds employ a systematic approach to fair valuation of international equities. The pervasiveness of this practice among international funds, along with the extensive analysis of fund performance measurements by investors, and the findings of our study, suggest that the mutual fund community can benefit from an introduction of fair value adjusted benchmark indices.”

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