Phil: Predicting research houses

Sunday, December 5th 2010, 11:31AM 5 Comments

by Philip Macalister

The recent, poorly-attended, FundSource conference and regulatory changes have got me thinking about the research market in New Zealand. For years it has been moribund with little happening and advisers showing scant interest in buying research from the two incumbents; FundSource and Morningstar. It's odd as years ago these two organisations (known by other names) ran highly successful conferences which were highlight events each year. Yet that must change as under regulation advisers will have to be using proper research. Morningstar has added more resources in New Zealand, even deciding to base its co-head of research, Chris Douglas, in Auckland. This appears to be a sign they are serious about the market again. But Morningstar and FundSource aren't the only players in town now. Lonsec have crossed the ditch and are pretty active in the market. Reports we have had back indicate that its research people and team are being well-received by managers. Van Eyk also have been active through its relationship with AMP (and we understand Perpetual). FundSource is the one which I find harder to figure out. I assume NZX acquired the business from David van Schaardenburg and NZ Funds, for its extensive database. NZX have shown it is a master at owning monopoly or near monopoly data business and extracting lots of dollars out of them. I guess it had the same idea with FundSource but has found it doesn’t have the same sort of monopoly characteristics. From what we can see there is little quant research being done by the house and it is unclear whether that will happen again. Also it’s unclear who is running the show. We have asked repeatedly after learning that the acting head, TJ Singh, left for a role at Ernst and Young. However every request has been rebuffed with an answer along the lines we are not going to tell you. Another thing to throw into the mix is that FundSource has partially changed its logo (well it did on the conference material), however the NZX site and FundSource site still have the old one. The bit which is intriguing is the old one had a star with five pointers – to go with the company five point research philosophy. The new one has a star with six pointers. Maybe we will get six star funds now? However more likely is that NZX will flog off the business to someone like Lonsec and stick to data businesses it can extract lots of dollars from.

You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

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Comments from our readers

On 6 December 2010 at 11:07 am Independent Observer said:

An interesting blog – as there are currently 4 research houses with plans for NZ, and only room for 2 (at a maximum). So who will win the race for survival?

The winner will need a robust database to efficiently grind through the quantitative aspect of research, with a responsible (and efficient) method of delivering the qualitative stuff. This latter component will divide the men from the boys, and is where the bulk of the value add is delivered.

With NZ IFA’s under the regulatory spotlight, research will become a necessary requirement for their own survivorship in business. Unfortunately for IAFs, they will be required to digest and assimilate the research for the benefit of their clients – albeit that they won’t be able to hide behind it if something goes wrong (ie: the research houses will provide all care but no responsibility). To effectively capture the majority of the domestic & foreign investment options, the research house will require reliable offshore research affiliations. Finally – the research house will need to make a significant commitment to the NZ IFA market, acknowledging that there is no prize for second place.

Putting all of this together, it will be difficult (near impossible) for some existing players to survive in this space.

On 9 December 2010 at 12:45 am Forthright said:

It is not a surprise the FundSource conference was poorly attended, you can’t keep dishing up the same hash and expect attendee’s to be licking their chops for second helpings.

In my opinion, Morningstar will emerge the winners in the quant race, other research providers will simply find it cheaper to do a deal with Morningstar for the figures and use their own skills to carve out a niche on the qualitative side. Qualitative on the other hand is when the real work gets done. Providing opinions on the folk who manage your clients’ money can leave a research house with a tidal wave of egg dripping from facial features. A recent example is Morningstars, we did, we didn’t, we might have, but we were misunderstood, recommendation of certain credit funds. This I am sure did not leave future AFA’s with much comfort of who would be in their corner when it came to a recommended product failure, resulting in a punch-up with the authorities.

What I find intriguing is how an AFA will recommend an ‘Unrated’ bond issue in the future. Also which research houses will provide the best research for future proofing portfolios’? How will the research providers recognise and provide AFA’s information on the corporate bond risk which was associated with issues such as Babcock & Brown, Blue Star, Nuplex, Irongate, Powerco, Yellow Pages Group etc etc?

I reckon there is already a stampede of future AFA’s to the comfort of relying on well researched recommended lists provided by their current or future platform supplier.

On 9 December 2010 at 5:35 pm Independent Observer said:

Forthright assumes that platforms are part of the industry's future... I'm yet to be convinced that technology will surpass the requirement to pay for these services...

On 14 December 2010 at 10:35 am traveller said:

The best research is done by Norman Stacey, a director of Diversified Investment Strategies. Read his View on www.diversified.co.nz

On 20 December 2010 at 10:43 pm oscar d nail said:

All the best for NZ Research houses.

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