Methodology of appraising management companies

Rating procedure consists of several stages. First - initial analysis of company-presented data and assignment of preliminary rating. Second – meeting company representatives, discussing issues following the primary analysis of the company’s operations. Third – final rating approval at the rating committee.

Appraising process provides for active and direct participation of the company itself in all relevant discussions.

Companies are rated regularly; updated information is used to monitor the company’s current status.

All appraisal criteria will be divided into three groups (A, B, C). Criteria points will be aggregated within a group. To get a certain rating you need a corresponding number of points in all three groups. (The methodology sets conditions prohibiting a company to get the highest rating).

Based on the points management companies are divided into three classes: A, B, and C. Classes А and В are divided into three subclasses. Depending on a class and a subclass, a company may be assigned an individual rating (all classes and subclasses are presented by descending order of appraising MC’s professional activity):

High credibility and quality

A++ (Extremely high (the highest) level of credibility and quality)
A+ (Very high level of credibility and quality)
A (High level of credibility and quality)

Acceptable credibility and quality

B++ (Acceptable level of credibility and quality)
B+ (Sufficient level of credibility and quality)
B (Satisfactory level of credibility and quality)

Low credibility and quality

C++ (Low level of credibility and quality)
C+ (Very low level of credibility and quality)
C (Unsatisfactory level of credibility and quality)

D (Revoking license or liquidation)

List of criteria for appraisal:

*Group А*
1. Company’s market experience		Criteria importance: below average
2. Appraising company’s personnel	a. Appraising management companies Each asset manager is appraised separately. Appraisal is based on individual CVs and personal discussions (if required). Results of work in current and in previous companies are taken into consideration. Education background and certificates are also taken into account.	Criterion importance: maximum
	b. Appraising company’s personnel as a whole Experience and number of attested workers is appraised. Investment-related employees are taken into account.	Criterion importance: above average
3. Appraising range of MC services	Appraisal is based on current licenses and presence of real clients. The following types of activities are taken into consideration: Trust asset management UIF management NSPF management Management of accumulative part of pension	Criterion importance: average
4. Appraising clientele	Number of clients is appraised (legal entities and individuals - separately). A company cannot get the highest rating if it has a client with share of total cost of assets in management exceeding 50%.	Criterion importance: average
5. Company’s reputation	Appraised: a. relations with regulator (form №1100, and №050) b. presence of overdue debts c. list of shareholders d. top-management reputation e. code of professional ethics Positive side: absence of conflicts with regulator in the area of “non-technical” violations, timely rectification of faults, transparency of shareholders. Negative side: regular “non-technical” violations and presence of overdue debts. Presence of court claims against MC is subjectively negative, too.	Criterion importance: average
6. Dynamics of profit, company’s market share	Appraised: a. Dynamics of company’s profitability b.Company’s “growth” (increased market share in areas of activity) A company cannot get the highest rating, if consolidated cost of net assets in management is below 9 bln rubles.	Criterion importance: above average
7. Relations with clientele	Appraisal is based on: a. number of agent’s outlets b. agreements with banks c. turning company’s funds at the secondary market d. accessibility of information about company (site, its content etc.). Feedback with clients.	Criterion importance: average
8. Appraising investment process	Appraisal is based on investment regulations and corresponding methods and systems. Presence of ISO standards is taken into consideration. In particular we pay attention to: a. What data is used to analyze current situation. b. Methods of appraising securities. Following changed prices, scenarios of actions when prices change (scenario activation threshold). System of limits. c. Appraisal of operative control. Presence of electronic system, regularity of backup, stress testing, supporting structures. d. Control of payment flows. Contacts with clients. Appraisal is based on company’s investment regulation and corresponding methods and systems (paper support is required).	Criterion importance: maximum
*Group B*
9. Risk-management appraisal	Appraisal is based on risk-management system and corresponding methods and systems, risk-management personnel. a. Appraising credit risk control b. Appraising market risk control c. Appraising operation risk control d. Appraising liquidity risk control Appraisal is based on company’s risk control regulations.
*Group C*
10. Appraising quality of asset management	Management efficiency calculation is based on methods of asset management quality appraisal, if asset management object (among those mentioned below) presents daily yield from 01.03.2004 to 01.03.2006. Appraisal is based on comparative analysis with main indices (Cbonds, S&P RUX), if final yields are available for intervals exceeding one day. The last appraisal has lesser weight comparing to appraisal based on methods of appraising quality of asset management. Based on company’s yield data. Company’s calculation methodology is taken into consideration. Data may be recalculated, if the methodology drastically differs from that of the agency. А. Appraising quality of management of fund assets UIF and NSPF management quality is appraised. Appraising UIF management efficiency: UIF managed for over two years are appraised. Each fund is appraised separately. Final UIF management appraisal is based on aggregation of appraisals for all UIF. Appraising NSPF management efficiency: NSPF managed for over two years are appraised. Each fund is appraised separately. Final NSPF management appraisal is based on aggregation of appraisals for all NSPF. В. Assessing management quality in MC Efficiency of pension accumulation management and management of other means are appraised separately. If a company calculates asset management yield (without UIF and NSPF portfolios) on the basis of composite portfolios with daily data of asset costs within the last two years, such portfolios are appraised in line with methods of appraising asset management quality.

Till 2006 Expert RA conducted MC distant analysis and assigned ratings. Presently such distant ratings are invalid.

Methodology of appraising management companies

Monitoring management companies' activity, 2007, the third quarter

Monitoring management companies' activity, 2007, the second quarter

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