Good morning,

Fund managers got a rare glimpse into one of Australia’s most influential research houses on Wednesday thanks to Rob Coombe’s Generation Development.

The ASX-listed financial services player owns 49 per cent of Lonsec, which runs a research house on one side and a separately managed accounts business on the other. What’s evident is both are shooting the lights out.

Lonsec boosted its funds under management by a staggering 143 per cent over the past year to $8.8 billion. Its underlying EBITDA has also spiked, up 57 per cent to $17.2 million.

Sources said the firm has pushed through a roughly 5 per cent increase in its research fees this year to $31,100 per fund plus $3500 for each additional fund class. That’s less than inflation but still something. If you’re a small boutique fundie with a couple of funds, it means you’re funnelling at least $60,000 to Lonsec every year (while being told to cut your fees).

But the real margin expansion came from Lonsec Investment Solutions – revenue was up 202 per cent and gross profit up 388 per cent – highlighting a trend for advisers to outsource their investment capabilities to external parties. Those figures certainly had the funds management industry talking.

It’s worth remembering that funds have almost no choice but to pay research houses – Lonsec or Zenith – to rate them. Most advisers, for insurance reasons, aren’t allowed to use a fund that hasn’t been rated and platforms won’t list unrated funds.

This makes the research houses industry gatekeepers, in both meanings of the word, protecting investors from bad actors and standing as bouncers at the door to the retail fundraising party.

A 2021 report from the Australian Securities and Investments Commission found that ratings from research houses are among the most significant drivers of fund flows, with a Highly Recommending rating delivering a 16 per cent increase in funds under management. A negative rating, we suspect, does worse.

The result did give some fund managers a reason to celebrate – substantial shareholders Wilson Asset Management, Ellerston Capital and River Capital.

Happy reading,

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