Top Researchers

The leading providers of financial research (investments) identified in this year’s Money Management Top 100 dealer groups survey employ a number of different approaches, ranging from global and domestic reach, different levels of client relationship and various service models.

Relative to the results of 2006 and previous years, there was not a marked change in the names ranked at the top of the list.

The top two research providers over the past four years have been van Eyk and Lonsec, with van Eyk being the dominant provider among the larger dealer groups, while Lonsec emerged as the most-used provider across all this year’s survey respondents. Mercer Investment Consulting represented the third most-used provider.

The leading 20 of the Top 100 dealer groups account for over 9,000 of the total 15,252 authorised representatives.

While Lonsec took first place when considering the overall top 100, which is measured by number of authorised representatives, van Eyk reaches almost a third of the authorised representatives within the top 20 grouping, providing research services to some of the country’s biggest dealer groups in 2007 and in previous surveys.

Lonsec has consistently scored a podium finish, ranking among the top three firms providing research to the Top 100 dealer groups in the last four years, but taking out top honours in this category for the first time in 2007.

It finished second to van Eyk in 2006 and 2005, and tied for third place with Mercer and Three Sixty in 2004.

Grant Kennaway, Lonsec general manager, research, highlighted the breadth of the research services it provides and its methodology as two of the key reasons for its ongoing success.

“Our research suite includes managed funds, property, agribusiness and direct equities, so it’s a solid solution for dealer groups.

“We position ourselves as a one-stop shop for research and stockbroking services, and we’re specifically targeting financial planners, so we’re pretty focused on that sector,” he said.

Kennaway refers to the Lonsec methodology as a “consistent, philosophical approach to research”.

It uses a primarily qualitative, forward-looking research process, with clear distinctions between the research processes employed across each of the four sectors of managed funds, property, agribusiness and direct equities.

“It’s forward-looking, but also consistent across the business … it doesn’t matter whether it’s a property investment, an agribusiness investment or a managed fund; we’re most interested in what is the likely investment return,” Kennaway said.

He believes Lonsec’s integrated business approach, whereby all aspects of its offering are provided in-house rather than using outsourcing or joint venture arrangements and all researchers work within the same office, is a considerable advantage.

Kennaway also identified Lonsec’s emphasis on strong client relationships as a reason for its ongoing success, pointing to its well resourced client service and marketing team, which helps it to remain relevant to the client base, along with its roles in a number of client investment committees and professional development days.

“Given that close relationship with our clients, I think that helps us stay in touch with what their needs are.

“I think that keeps you close to the client base, that’s how you stay focused. We just keep our head down and do our work … we’re very business focused,” he said.

Van Eyk ranked a close second to Lonsec, with 17 respondents identifying it as the primary provider of funds research.

Mark Thomas, director of van Eyk, said he was surprised at this year’s second place ranking, having achieved first place in the previous three years and grown the reach of its research business significantly in the last 12 months.

“Comparing where we are this year versus last year, we think we’ve gotten stronger,” he said, pointing out it has had a number of big client wins since last year, including a major Australian bank.

“We’ve grown our business, we haven’t lost any top 100 clients this year and last year we were strong,” Thomas said, also mentioning the exclusive arrangement it has struck with Coin, whereby anyone who uses Coin financial planning software must use van Eyk as its research provider.

However, he acknowledged that its over-representation among the larger financial planning dealer groups might account for this anomaly.

He believes one aspect of the van Eyk business that sets it apart from the competition and accounts for its ongoing success is the broad experience of its sector researchers.

“We don’t have specialists on a sector by sector basis, we rotate people across different areas.

“Our people will cover a whole range of different reviews, whether they’re domestic or overseas managers, and that way we get rotation and we don’t get any favouritism creeping into the overall process … we think we get a robust outcome [this way],” Thomas said.

While the van Eyk research methodology does have some standardised criteria that is applied across the board, Thomas said it adapts its research according to the industry and business type that is under review, and it also tries to contextualise its research process to match the market environment at the time of the review process.

“It’s not just a binomial approach where we say everything’s equally weighted or the weights stay the same all the time. It varies depending on who we’re looking at, which is commonsense in our view,” Thomas said.

He thinks its interview process is one of the most rigorous in the market, with van Eyk often sending its analysts offshore for two or three weeks at a time and spending up to eight hours a day in client interviews.

“Our guys aren’t in there just ticking boxes. We spend a lot of time in interviews … our process is pretty intensive,” Thomas said.

He also points out van Eyk’s pedigree in terms of brand strength and quality of research and service, admitting that while it is not one of the cheapest providers in the market, clients understand the reasons for this and that cost is not always the best deciding factor.

“There might be some people that get focused on costs. We think you need to be focused on what you get for your money.

“When they buy van Eyk, they’re buying into a certain brand, a certain quality and a service which they can rely on … and a lot of people get that.”

He explained that van Eyk’s higher costs relative to competitors are partly due to the absence of a ‘pay for ratings model’: “We don’t have a pay for ratings model which we can subsidise our subscription rates by.

“Our client is the planner, we own the intellectual property of the rating. The fund managers don’t pay us anything,” Thomas said.

Mercer Investment Consulting has been a solid performer throughout the history of the Top 100 dealer group survey, having achieved third place this year, in 2006 and in 2004.

Simon Eagleton, business leader for Mercer Investment Consulting, Australia and New Zealand, attributes this consistent adviser demand for its research to a number of factors.

He believes its global approach is one key differentiator of its research, with the business employing over 45 full-time researchers worldwide, including nine covering Australia and New Zealand and four in Asia.

“We think that’s absolutely critical. If you’re holding yourselves out to your clients as a research house that can identify future outperformance you’d better be close to the … fund manager world, which is global in nature.

“We know it’s important, and the ranking in the survey shows that many of the Top 100 dealer groups think it’s important too,” Eagleton said.

He referred to the relative prevalence of global researchers within the institutional space versus retail, and wondered how those researchers with only a domestic presence can provide the necessary depth of information to their clients.

“It surprises me that you can be purely domestic in terms of your resources and yet cover what is a very vast universe of investment managers and products, particularly in the retail space, an increasingly sophisticated market, and not have resources available to research them on the ground,” he said.

According to Eagleton, Mercer’s global, ‘always-on’ ratings process enables it to respond rapidly to market and individual company changes as they occur.

This applies equally to new businesses approaching them for ratings and to those with existing ratings that undergo changes such as key staff movements, business acquisition or other internal developments.

He also holds up its qualitative research methodology as a defining characteristic of Mercer’s research, using a process that “is all about identifying the ingredients that go into future outperformance”.

“We don’t’ follow one of these ‘PPP’ (people, performance, process) processes of studying fund performance,” Eagleton said.

Instead, Mercer’s approach looks at four main areas contributing to outperformance: idea generation, portfolio construction and calibration of this, overcoming of implementation costs and business management, which covers environmental factors such as business culture, and compatibility of various business units.

“For us, that means we can have a highly rated manager who might well be a firm owned by a financial services business; we can also have a highly rated manager who might be a boutique that’s owned by its principal.

“In both cases, there can be good business management environments with good alignment,” Eagleton said.

He also emphasised that Mercer’s fund ratings are not subsidised by fund managers, and pointed out that clients have indicated this is another reason why they retain Mercer’s research services.

“The predominant business model in the Australian market [sees] the funds management community paying the research houses to rate their products, and that, in our mind, is an obvious source of conflict.”