Any further research house exits from Australia’s research market will have significant repercussions for the industry, an industry consultant has predicted.
“Do I think exiting is likely to continue? Yes,” Hunts’ Group Consulting senior consultant Wayne Wilson told InvestorDaily.
Wilson’s comments follow last month’s announcement by Standard and Poor’s (S&P) that it would close its local funds research and wealth management services in October, and amid further talk in the industry of a reduced market due to more exits.
Lonsec, Mercer, Morningstar, van Eyk and Zenith remain the existing research houses that offer ratings of managed funds in Australia.
Cynicism among some financial planners regarding the role research houses played, as well as a reduced number of fund managers entering the market after the global financial crisis, had resulted in lower demand, Wilson said.
“It’s a real risk that more might have to exit [as] it’s certainly a reduction in the layer of competition and probably as a result of that it will decrease scope in what the remaining houses will try to achieve to make themselves more competitive,” he said.
“We might find that it becomes impossible for the small entry-level funds management businesses to get a rating, full stop.”
He said he believed competition was a “good thing”, but it was difficult to enter the market without being a certain size.
“But if the international players start retreating from that market, it could be that we have the opposite problem – that in a few years there are not enough high-quality research houses providing underlying research of trust structures,” he said.
He said in terms of product selection, the industry had a grossly over-serviced selection of opportunities, such as the number of Australian equity managers in the field.
“It’s a real catch-22. Those services can only spread themselves so far before they’re actually not doing a great job on any one of the underlying funds and that’s when a few slip through and causes problems,” he said.
In terms of whether Australian research houses are gaining any benefit from S&P’s exit from the market, existing researchers were guarded.
Lonsec director Jason Clarke said the firm always kept in contact with potential clients, but had not received any requests for help from S&P clients, nor had it approached them.
“It’s obvious there are some large institutions and some smaller ones with some needs, which of course we can meet, but we haven’t gone out desperately trying to hound them down,” Clarke said.
“I’m genuinely disappointed that a competitor has gone because having more competitors in this space helps you to diversify your offering and be quite relevant.
“If it’s a diminished space and you’ve just got a couple of leaders, the quality of research is only going to drop off. I don’t want to see that happening.”
Mercer head of wealth management Brian Long said the firm was not talking to S&P, but would announce new client tenders shortly.
“One of our strengths is that we have 145-plus people in our investments business in Australia and, as a result, we could take on a couple of major banks and not have to recruit [more staff],” Long said.
“If a client were to come to us, that would mean a lot and we would consider that obviously, but we don’t need to race out and hire someone every time we win a new client.”
In response to S&P’s exit, van Eyk chief executive Mark Thomas said it was a reflection of an overcrowded and over-serviced market.
“There’ll be others that will drop off in time,” Thomas said.
He would not comment on whether van Eyk had been approached by S&P clients or analysts, but confirmed the firm was not hiring.
