The research industry is struggling. Under the weight of product innovation and a demanding end client, big name research houses admit the whole research industry faces a huge challenge; one that will see increased fractionalisation and consolidation. "We are all struggling with the [product] volume. Volume is putting a lot of pressure on research teams," Standard and Poor's (S&P) fund ratings director Mark Hoven says. Van Eyk director Mark Thomas agrees it is becoming more difficult in the research industry.
"The market is becoming more and more complicated each year. In the old days we did two equity reviews each year - domestic and global. These days we cover eight to 10 reviews in the equity sectors alone plus specific sectors like emerging markets and Asian equities," Thomas says. The newest research house to arrive on the Australian market, S&P says the past two years have been a constant balancing act of factoring in new growth channels, such as infrastructure and hedge funds, but at the same time to staff these specialist areas with the right people.
"Some companies are struggling. The research market size is going to increase but the number of players will come down. The forces that are coming to bear are going to be terminal in some cases," Hoven says. Thomas is not so sure on this outlook for the industry. "For years there have been new entrants in the research game and many with deeper pockets than us. All I would say is that throwing money at it is not the answer to success," he says.
Growth amid struggle
Yet despite these stark warnings and admissions, the research industry reports growing market bases, greater dealer group penetration and an era of significant innovation. Researchers say while demand for research on structured products, infrastructure, global property and fund-of-fund hedge funds is definitely putting more pressure on their resources, it also has research houses looking for a competitive edge and better ways to deliver much wanted information to a thriving planning industry. "Business is going well. We are in an industry that is growing. There is money in superannuation. Investment markets are up. We have gotten stronger," Morningstar Australia head of research Anthony Serhan says. Lonsec general manager Grant Kennaway agrees. "We are very busy. There is a lot of activity across all areas of the research business. We have grown strongly over the past few years, particularly with boutique to medium-sized groups." Only last week Lonsec announced its appointment by MLC's ThreeSixty as its preferred primary research provider. ThreeSixty says for the past six months it had been looking to evolve its "insource-outsource" research model to allows its in-house research efforts to focus on specialised research services such as portfolio construction and investment communications. Meanwhile, van Eyk also continues to expand, particularly in the model portfolio and reporting space. "We continue to win contracts with large dealer groups (ANZ this year) whilst also winning contracts in the boutique space," Thomas says. "Our consulting business has grown strongly this year in the provision of model portfolio advice and reporting. I would say this is the boom business within van Eyk at present."
IFA 's annual Dealer Group Survey Top 100 demonstrates Lonsec's slight dominance in the market ahead of van Eyk with 43 of the top 100 dealer groups now using Lonsec research. It is followed by van Eyk, which is used by 40 dealer groups, and Morningstar, which is used by 34 groups. A dealer group uses on average the services of 3.5 research groups. Kennaway says while the research industry is always competitive, Lonsec competes successfully in the market by focusing on consistency and innovation. "We have really focussed on delivering a quality product," says Kennaway. "That's research but it's also value adding such as model portfolios and our offer to clients. You need to continue to be innovative."
Qualitative and quantitative
Lonsec uses qualitative and quantitative research to cover managed funds, direct equities, property and agribusiness. The company believes the latter sector gives its research a point of difference as "most research houses run away from rural enterprises because it is too difficult". As noted on its website: "We see ourselves as specialists with one category of client rather than someone trying to make everyone happy and suffering the inevitable compromises." Meanwhile, Hoven says S&P's focus is on the top 25-50 dealer groups in terms of the number of planners, but it also has good take-up with the middle tier businesses that employ 10-20 planners. He says readership has grown 30 per cent in the past year. Like Lonsec, S&P also considers its strength to be in the research of alternative assets - asset classes such as structured products, the hedge fund market, infrastructure and commodity products.
In covering such a broad range of asset classes, Hoven says dealer groups effectively have a one-stop shop in terms of S&P's research being able to cover all products on their approved product lists. Thomas believes the increase in research work conducted across a broader range of asset classes is a trend here to stay. "This year already our analysts have made four overseas trips - one-on-one sessions with fund managers on our research agenda. I see this as an increasing trend. Alternative asset research is also on the rise and typically requires overseas research, for example, hedge fund of funds, global macro, gold, commodities and relative value," he says. As a result of this growth in research, research houses have had to rethink the way they organise their businesses. S&P has set up a two-person administration back office to conduct some of the base work and to facilitate the adequate staffing of new growth areas. While van Eyk may not have changed its process in response to the greater workload, it has reorganised its research teams to enable them to conduct more simultaneous reviews. "We now have joint heads of research and have the capacity to run three reviews concurrently," Thomas says. Adding asset classes to research agendas is not without proper consideration, and is the result of an interactive process between planners and research houses. Serhan says while this process is demand driven, it does involve consideration of the investment merit of the asset class in question. "Where there is merit we have picked it up. Global property had investment merit as an idea. Last year the new sector was fund-of-fund hedge funds and the first ever global property coverage," he says. A major development for the research industry this year was Morningstar's March acquisition of S&P's fund data business. The deal had many people wondering whether this would be start of a new wave of consolidation in the industry.
From Morningstar's perspective and from a global context, the acquisition gives them a stronger global data base; a capability it is keen to emphasise. "Increasingly we are leveraging more of our international linkages, It comes down to relying on Morningstar to have a view on managers. It's one thing to go visit them from time to time to having people on the ground and getting a feel on how they're tracking," Serhan says. And what does this capability mean to financial planners? "We're aware of changes ahead of local BDM's [business development managers]," Serhan says. While this global attribute is viewed as a competitive feature, Serhan believes the actual level of competition in the research industry has been overplayed. Rather, he says the main business drivers have been an increasingly knowledgeable and vocal planner market and the actual growth in the size of the financial planning market and the funds it manages. This is particularly the case in model portfolios where he says advisers are looking for shorter and shorter lists while approved product lists are growing.
"Advisers are becoming more discerning and articulate in what they want from research houses. They have made a lot of us sit up and see what we are delivering on that front," he says. Hoven says S&P has been working hard on the timeliness of its research and the confidence with which it rates fund managers so "the way we call it is the way it will play out". Further, he says by delivering its research on an annual cycle, financial planners can best use the research at the time they are conducting annual reviews. This approach has been further enhanced by an active seminar process that has involved a shift from having Sydney and Melbourne-centric seminar presentations to actively participating in dealer group professional days.
