Managed funds research trends – how Lonsec is adapting


Amanda Gillespie… ‘retirement piece is what we, as an industry, have to come to terms with.

Lonsec Research is one of the main entities under Lonsec Fiscal Holdings, the result of the ownership change and recapitalization of the Lonsec research and broking group in mid-2011 with the SuperRatings super fund research firm. Amanda Gillespie, a long-time Lonsec employee and the chief executive of Lonsec Research, is well placed to comment on the retail ratings part of the managed funds industry. She speaks with Greg Bright.

Amanda Gillespie’s first funds she was handed to research and rate when she joined Lonsec in 2000 were the small group of tech funds – not an easy task when the then-hot asset class was new, niche and possibly risky. While she looked at the quality of the people at the funds – such as that of Colonial First State and the TIME fund of her former employer, BT Funds Management – these funds were clearly not for everyone. She says that this is a great example of highlighting what a fund rating is, and what it isn’t. “A rating aims to communicate the conviction that is held in a product relative to its peer group … does it have the requisite skills and processes to deliver on its promises, over a full cycle? It should highlight the opportunities, risks and investor suitability but it is not a market timing call. A fund may be high quality but, depending on the cycle, sector it invests in and the particular needs of an investor, it could be a good or bad time to buy.”

She was reasonably constructive on the calibre of the people running the funds and the processes, but warned of the risks and niche nature of the tech funds, which proved to be prescient. Most collapsed to a fraction of their 1999-2000 values within a few years.

Lonsec started life as the inhouse research group for the Zurich-controlled Lonsdale dealer group. After Zurich sold Lonsdale, it kept Lonsec for the next 10 years, allowing it to grow as an independent research firm.

Gillespie says that when she joined after six years at BT, Lonsec had three researchers. After a year in Melbourne she moved to Sydney and established an office there, which gradually expanded. Now there are 38 people within the research business, across the two offices and the broking arm has been split off into a separate entity.

At BT she had been lucky to work for two seasoned managers, first Mike Crivelli in the sales and marketing area, followed by Adrian Blundell-Wignell in investments, focused on asset allocation and risk. Crivelli went on to launch Perennial Investments after he left BT and Blundell-Wignell joined the OECD. BT has a long list of successful alumni.

Gillespie got involved in setting up model portfolios for Lonsec clients, taking responsibility for that from the Sydney office. Lonsec then established a separate consulting team in 2005, and Gillespie built that out in Sydney.

On the sale by Zurich she says: “The big change for us is to be owned by a private Australian company with a suite of complimentary financial service offerings. It was an opportune time because of the enormous changes in the industry and, as a business, we needed to embrace that and make sure we had the right services and were nimble in the new environment. The new ownership and structure has been extremely supportive of that.”

Apart from the raft of regulatory changes affecting financial planners, particularly FOFA, there are more fundamental questions facing the managed funds industry as it relates to financial advice. For instance, Gillespie says, she is often asked: “Are managed funds dead?” This is due largely to the continuing rise of SMSFs, the speed of which is perhaps even accelerating.

A typical portfolio mix for an SMSF is a dozen or so bluechip direct stocks, some cash and term deposits, some property – geared or otherwise – and perhaps a managed fund or two or a couple of ETFs. Their use of managed funds is much less than that of the traditionally advised investor. And less than one-third of them take advice from a financial planner. The accountant appears much more important in the SMSF trustee’s mind.

Gillespie says: “There’s definitely a trend to a broader universe of product and use of different access points, such as SMAs… But there’s still over $2 trillion in managed funds and they are fighting back, particularly in terms of product innovation and different fee structures.”

On the fee side, the huge interest in ETFs, as well as investors questioning the merits of paying a higher (active) fee when returns were so poor during and post the GFC, have both prompted a natural response to look at costs across the board, she says. “In our multi-asset sector universe, we now have a very well populated low-cost diversified sub-sector, for example.”

The product innovation, most recently, has been around income-orientated products for retirement, as well as products which offer a real return or absolute return. Plus, there are new products like the managed volatility funds. But Gillespie admits that at the higher end of investor assets, there is a still a trend to direct investing.

“But irrespective of whether investments are unlisted or listed, the retirement piece is the key that we, as an industry, have to come to terms with,” she says. “We have focused on the accumulation phase and now, due to the demographics, we have to look at retirement needs. (Investors) needs are changing, particularly their tolerance for volatility and capital loss. “The end investor doesn’t really care about the ‘jargon’ that we, as an industry, tend to use, such as ‘sequencing risk’, alpha and beta. Very simply, they want returns to cover specific target expenses and meet their specific needs, particularly if they are going to live another 20 years or so after retiring. Outcome-orientated investing is not just relevant for retirees, it’s relevant to any investor.”

Advisors are very well placed to match client objectives with strategy, as they know the client best and they now have many more product choices available to tailor to individual circumstances.

There is also a trend, Gillespie says, post-GFC, for managers to have greater flexibility, specifically with mandates with broader bands of asset allocation. “There was a lot of discussion around why we didn’t have mandates which allowed managers to be more defensive… but then the next question is, what do we call this type of fund? A diversified fund or a hedge fund?”

Following the ownership change and in recognition of the complimentary research undertaken by sister company SuperRatings, Lonsec Research is broadening out its qualitative research to cover industry and government sector super funds. This will enable the Lonsec group to provide clients with a like for like comparison across industry and retail super, at both the fund and investment option level.

“We’re in an interesting time in terms of the playing field between the retail and industry super space,” Gillespie says. “Industry funds are building out their advice businesses and at the same time, the best interest obligations under FOFA mean there is a need for better product comparisons across (not just within) the retail and industry sectors. Transparency and the ability to understand what’s going on within a product (no matter its heritage) and conduct adequate due diligence are an important part of the advice process…

“The type of specific guidance we provide in a research assessment is a challenge. Lonsec’s ratings are designed to only provide general advice, because we don’t (and can’t) know the investor. But we can step a bit closer to the line in terms of providing more ‘granular’ information on each product’s characteristics, beyond the overall quality stamp represented by the rating. Ultimately we need to give the adviser as much information as possible in order to best match client and product suitability.” 

Lonsec Research has around 4,000 subscribers and researches 700 products across mainstream and more specialised sectors. Producing in-depth research requires lots of leg work and Lonsec has a big team dedicated to doing just that. Gillespie points out that anyone who subscribes can directly call and speak to an analyst. Subscribers use Lonsec’s research in different ways, depending on their business model. No longer is external research a ‘one size fits all’ in terms of what advice clients are looking for … Just like the end investor who wants a customised solution.

While the Lonsec view is that there is no ‘one way’ to manage money, her personal investment style involves a belief in active management in certain asset classes, for the right fee, and a bias towards value investing.

“I believe in being active in small caps, global and emerging equity markets in particular. I have a preference, too, for benchmark agnostic mandates … there’s no safety in the benchmark. I also believe there is, absolutely, value in paying for professional management.

“In terms of the advice industry looking ahead, while there has been a concentration of advice in the past few years, my personal view is that the industry will (to some extent) segment again. The ongoing influence of technology on advice delivery and the different needs and ultimate control demanded by end investors will necessitate it.”