In the late 1980s Estate Mortgage was virtually the only game in town for media covering the retail managed funds industry. The company, which promoted itself as being “just like a bank or a building society, but even better”, eventually collapsed in 1990, owing investors about $600 million.
Leading the scrutiny of Estate Mortgage was a research house that identified what it believed were severe shortcomings in the structure and the management of the funds. That research house was a business that later became known as van Eyk Research, and its work on Estate Mortgage was its making.
In September this year, van Eyk Research entered voluntary administration. While the full details of how, and why, have yet to emerge, it’s clear that a decision to diversify into the managed funds business, with its Blueprint funds, played a part.
READ THE FULL PROFESSIONAL PLANNER COVER STORY, THE EVOLUTION OF RESEARCH
Research businesses have to evolve to remain relevant – a roll-call of research organisations that have come and gone from the Australian market in recent memory includes FPI, 5Di, Assirt, IWL and Financial Facts, to name but five – and they need secure and robust revenue streams to fund what they do.
Van Eyk placed great store in the fact that it was paid by subscribers to its research, not by the fund managers whose products it reviewed. It moved to secure additional revenue streams from its research activities by using them to underpin a funds management business. But it seems to have run foul of a corporate structure and corporate governance that wasn’t up to the task – a lesson for all research houses, and for the advisers who depend on them.
Early point
The impact of van Eyk’s predicament is difficult to gauge at this early point, but it is not expected to diminish competition in what is already a competitive space. And it is not expected to halt the evolution of research from “straight” fund ratings to implemented solutions – and beyond.
David Wright, a director of Zenith Investment Partners, says competition in the Australian market has always been intense, and will remain that way.
“I don’t think it’s going to get any less,” Wright says.
“Given the nature of the Australian market, the compulsory growth in superannuation, you see a lot of global managers coming to the Australian market because they see the pool of money. Equally, there will be new [research] players.”
It’s not impossible to operate a funds management – or “implemented consulting” – business alongside a research business, says Anthony Serhan, managing director of Morningstar’s Asia-Pacific research strategy, as long as corporate governance is adequate.
“In 2009 we acquired a business called InTech, which had an implemented consulting capability – it’s now branded Ibbotson,” Serhan says.
“Running a funds management business is a very specialised activity, and one that you can’t just grow into overnight. It does require stronger corporate governance to run it, because you are taking people’s money on board, as opposed to just giving advice on what to do with it.
“That’s one of the things that our business is very strong on; and when we look at the way we operate that, the separation of responsibilities is an important element of that. It doesn’t mean the two parties can’t talk, but it’s a stand-alone business with a separate reporting line.”
More about portfolio solutions
David Wappett, head of ThreeSixty Research at MLC, says advisers are increasingly thinking less about just individual funds and stocks, and more about portfolio solutions. This means the way ThreeSixty conducts its research and communicates its findings to advisers is changing.
“We’re being asked more and more portfolio construction questions, rather than just yes or no, is this fund on the APL [approved product list] or not on the APL, or can I get another fund on the APL?” Wappett says.
“There’s a lot more focus on how do I use these funds when I put together a portfolio? That leads us to our model portfolios, and we’ve put in a lot of time and effort to try to explain the client needs and the client profiles that we’re building these portfolios for.
“There’s a lot of interest in that discussion and we’re trying to spend more of our time in that part of the market, because that’s where the conversation with us has gone.”
Piers Bolger, head of research and strategy, advice and private banks, at BT Financial Group, says the work researchers do – whether they’re [an] external research house, inside a financial planning practice or housed within a licensee or dealer group – will always be the foundation on which financial planners build effective investment solutions for clients.
“If you think about the regulatory environment, your APL is actually your first line of defence,” Bolger says.
“It shouldn’t be seen as a handbrake. It’s actually there to help you, because the work’s been done; and if it’s been done well, it allows you to make appropriate recommendations and deliver the right solutions to clients.
“In order to do that, and to do a good job of that, you need to not only do appropriate research on that particular strategy, you need to have research on the relevant elements of that strategy compared to others in the marketplace. Without doing both, it’s very hard to say whether that strategy is good or bad in isolation.”
This is an edited version of the cover story that appears in the November 2014 edition of Professional Planner.
