In The Big Short, Steve Carell’s character, hedge fund manager Mark Baum, visits a ratings agency to ask why mortgage investments are still getting top ratings when the loans behind them are going bad.
He’s told that giving the banks a lower rating would simply send their business to another agency.
In other words, the ratings agency is paid by the banks selling the investments. But its investors rely on its judgment and bear the cost when it gets things wrong.
Are Australia’s fund ratings truly independent?
The fund ratings industry in Australia has a similar conflict since the manager being assessed is often the customer paying for the research. An analyst can do honest work within a business that still has a commercial reason to keep that customer.
The trouble at Metrics Credit Partners has brought that conflict back into the spotlight.
Ratings house Zenith had rated Metrics Master Income Trust “highly recommended” and two other listed Metrics funds “recommended” before the recent turmoil. Zenith has continued to back Metrics following its audit dispute and the suspension of withdrawals from wholesale funds.
Lonsec took a different view, downgrading two Metrics funds in September 2025 over governance concerns.
Advisers and their licensees rely on ratings for due diligence. A favourable rating can get a fund on to an adviser’s approved list and lead to more recommendations and more money flowing into the fund. Retail investors may never read the research themselves, yet their savings can still heavily depend on its conclusions.
Without the visible market prices of listed shares, assessing private credit and other unlisted assets means testing assumptions about borrowers, asset values and liquidity risk. A research house needs to challenge the manager’s account of its own investments even when that manager is paying for the assessment.
Investors need to know how that relationship works.
Who pays for investment fund ratings?
Zenith’s financial services guide says it charges the issuer or fund manager an “upfront flat fee” to produce fund research. It also says its fees aren’t linked to the views in its reports or the rating outcome.
Paying for research isn’t the same as buying a favourable verdict. But keeping the fee separate from the rating doesn’t remove the commercial incentive to retain the customer. Give a manager an unfavourable assessment and it may decide your research isn’t worth paying for next time.
ASIC identified this problem in 2012 after concerns about highly rated investments such as Trio Capital that subsequently failed. Its guidance specifically addressed conflicts arising from managers paying for research and research houses selling other commercial services. Fourteen years later, investors still need to ask who’s paying for the opinion.
Do better ratings mean better investments?
Some research suggests they offer far less guidance than the badges imply. Vanguard’s 2010 study followed funds for three years after they received a Morningstar star rating. On average, 39 per cent of five-star funds beat their style benchmark. For one-star funds, it was 46 per cent.
In that study, choosing the higher-rated funds didn’t improve investors’ odds.
Morningstar’s stars measure past risk-adjusted performance rather than an analyst’s view of a fund’s future prospects. But someone choosing a five-star fund is usually hoping it’ll be a better investment, and a record of past success isn’t enough to establish that.
That study doesn’t settle how useful today’s ratings are, but it does show why investors need to see the record behind the badge.
How fund ratings influence investment awards
No rating, no entry
At Stockspot, we recently encountered another problem with the ratings system.
When we tried to enter the Fund Manager of the Year Awards, which are operated by Prime Creative Media, we were told our investment options weren’t eligible because they weren’t rated by Lonsec. Lonsec is the awards’ exclusive partner and selects the finalists in the fund categories.
We were told eligibility required at least three years of Lonsec ratings. For us, that would have meant paying for years of research before we could be considered. No Lonsec rating. No entry.
An investor seeing the winner’s badge wouldn’t necessarily know that eligibility depended on a rating from the awards’ commercial partner. An unrated portfolio could have excellent performance and client outcomes and yet still never reach the judging stage.
If an award considers only products rated by its commercial partner, I think it needs to be made clear to investors. Say it where investors can see it. Beside the winner’s badge would be a good place. “Best fund” and “best fund from the Lonsec-rated products we considered” can mean very different things.
Who pays and who checks?
Research costs money and analysts should be paid for their work. A good solution would be to offer subscriptions that are paid for by advisers and investors using the research and remove the fees fund managers are being paid to being assessed. This removes the perceived conflict.
Subscribers could potentially gain comparisons across the market, including smaller managers and low-cost products that don’t pay for ratings. Coverage would follow demand for useful research rather than a manager’s willingness to fund an assessment.
The result could be broader coverage and less pressure to keep a manager happy, since an unfavourable verdict wouldn’t threaten a research fee from the fund being judged.
Yet, changing who pays is only half the answer.
Why fund ratings need greater transparency
Research houses should also publish the full history of their ratings for every fund they’ve assessed, with a date attached to each verdict. Every upgrade, downgrade and withdrawal should remain visible, including funds that later closed or failed.
The public could then see what happened after a fund received a strong endorsement. Did it deliver? Did warnings come before investors lost money or after? Were highly rated funds any better than comparable alternatives?
Fund managers are expected to show their returns, and investors should be able to hold research houses to the same standard. If a research house recommends where people should put their savings, we should be able to see how often it got that judgment right.
Invest with transparency, not hype.
At Stockspot, we believe investors deserve to understand what they own, what they pay and how their investments perform.
This article was originally published as an opinion piece for The Australian – Metrics turmoil puts spotlight on fund rating conflicts for investors (14 October 2026).
