‘Deeply disheartened’: SQM responds to Shield, First Guardian concerns

No link in the chain is being spared from scrutiny as the fallout from Shield and First Guardian’s collapses continues, particularly as the corporate regulator signals its investigations will be wide-ranging.

Noting that these scandals have “raised serious concern across the investment community”, SQM Research managing director Louis Christopher has sought to defend his firm’s role in providing a favourable rating for the funds, adding he is “deeply disheartened by the events that have unfolded”.

Prior to ASIC taking action against the funds and the responsible entities entering administration, SQM had rated both Shield and First Guardian at either 3.5 or 3.75 stars.

“These ratings reflected an ‘investment grade’ classification under our methodology, but they were at the lower end of that scale,” Christopher said on LinkedIn.

“Ratings in this range may reflect characteristics such as limited operating history or areas of governance requiring monitoring. It’s also important to note that many platforms set a minimum threshold of 4 stars for product inclusion.

“Both funds were subsequently downgraded when we became concerned about limited disclosure, irregularities and a lack of information from the fund managers.”

As the research house boss pointed out, even the strongest rating it had provided to either fund came with a caveat.

SQM’s methodology breakdown and rating guide on its website is clear that any fund in the 3.5 to 3.75 range includes a strong recommendation that advisers “conduct additional due diligence over and above base requirements when considering such rated funds”.

However, some of the media coverage that detailed these ratings in relation to the failed funds “has not presented our ratings in full or accurate context”, Christopher said.

“Publicly available commentary and statements from various parties suggest that the failure of the funds may involve irregularities in investment activities and the movement of investor funds,” he added.

“It appears that these matters may not have been fully disclosed to ASIC, investors, advisers, platforms, or SQM Research. We understand that ASIC has been investigating these matters for a significant period of time and that questions remain.

“We’ve been in ongoing contact with our adviser and platform clients, and we appreciate their continued trust and understanding. We remain available to support all stakeholders during this period and welcome any questions regarding our research process or individual ratings.”

The response follows The Australian Financial Review reporting that, according to an anonymous source, Netwealth has decided to part ways with SQM.

Netwealth has not officially announced a decision and Christopher has refuted the claim.

Just last week, ASIC chair Joe Longo echoed the regulator’s recent messaging on these firm failures, stressing that while bad financial advice is “obviously a key part of this problem”, it’s far from the only one.

“There are a whole range of other entities that are involved in this process that we’re looking at – for example, the lead generators, the research houses, the superannuation trustees, and the managed investment schemes,” Longo said at an FSC event in Sydney.

“Because of the number of entities involved, it can be difficult even for experienced investors to spot the problems here and what’s really going on.”

He added: “When we look at these examples, we see that the various players across different sectors each represent just one aspect of the problem – a problem in my view that needs a holistic response from industry, regulators and from government.”