Investor demand and regulatory scrutiny are driving a biodiversity evolution.

Biodiversity is rapidly emerging as a core component of Environmental, Social and Governance (ESG) policies among fund managers, reflecting growing recognition of its financial and systemic implications.

Recent analysis of the Lonsec manager universe shows a sharp increase in biodiversity-related disclosures. The number of managers reporting a policy position on biodiversity has surged from 21 to 72 in the past year, out of approximately 300 managers. Lonsec’s internal rating of the strength of these policies has also more than doubled, signalling a significant improvement in both quality and depth.

This trend underscores an industry-wide shift toward proactive management of biodiversity risks, which are increasingly viewed as material to long-term portfolio resilience. Approaches vary:

• Some managers integrate biodiversity into broader ESG frameworks, using metrics such as natural capital and deforestation risk.
• Others adopt dedicated biodiversity policies, toolkits, and roadmaps to guide investment and engagement strategies.

Global initiatives are also gaining traction. Participation in coalitions like Nature Action 100 and alignment with frameworks such as the Taskforce on Nature-related Financial Disclosures (TNFD) are becoming common, helping standardise reporting and foster collaboration.

Despite progress, gaps remain. Many managers acknowledge biodiversity risks but lack formalised policies with measurable targets. Integration often occurs indirectly through climate strategies, and some disclosures remain generic.

Investor demand and regulatory scrutiny are driving this evolution. Enhanced transparency and structured approaches to biodiversity risk management are expected to become critical differentiators for fund managers seeking to maintain trust and deliver sustainable outcomes.

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Regulatory expectations are increasing. ASIC Report 818: From superficial to super engaged (REP 818) calls for clearer, more practical communication on how retirement risks are managed. The Retirement Income Covenant further requires trustees to consider income stability, flexibility, and duration in tandem.

“Report 818 urges trustees and product issuers to move beyond generic messaging and provide members with clear, practical information about how retirement risks are being managed”, writes Andrea Theouli, Manager, Multi-Asset at Lonsec Research and Ratings. “This includes communicating not just ‘what’ a product does but ‘why’ it’s structured that way.”

Sequencing risk (the impact of return order during drawdown) and longevity risk (the challenge of sustaining income over extended retirement periods) are now central to portfolio construction. Research shows that even moderate volatility can accelerate capital depletion when withdrawals are constant, particularly in the “retirement risk zone” around the transition to retirement.

In response, product design is evolving. Lifecycle options, multi-asset income funds, annuity-backed solutions, and investment-linked products are increasingly used to balance growth, defensiveness, liquidity, and behavioural comfort. These tools allow for more precise targeting of retirement risks and better alignment with individual timeframes and needs.

However, managing these risks involves trade-offs. Strategies that reduce sequencing risk may dampen long-term returns, while those addressing longevity risk can limit liquidity and flexibility. Transparency in how these trade-offs are handled is essential for building trust and supporting informed decision-making.

Performance measurement in retirement is also shifting. Traditional metrics like total return and volatility are being replaced by outcome-based indicators such as income sustainability, drawdown consistency, liquidity coverage, and longevity alignment. These measures better reflect the realities of the decumulation phase and the long-term goals of retirees.

The retirement investment landscape is becoming more diverse and dynamic. Success will be defined not just by returns, but by the portfolio’s ability to deliver stable income, manage uncertainty, and meet the evolving expectations of both regulators and retirees.

Read the full paper.

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The report provides a comprehensive view of the evolving advice ecosystem, highlighting trends in adviser sentiment, investment preferences, and the growing importance of integrated research and technology solutions.

“We are honoured to be recognised once again by Adviser Ratings,” said Lorraine Robinson, CEO of Lonsec Research and Ratings. “This achievement reflects the trust placed in us by advisers and industry partners, and underscores our mission to empower the advice profession with actionable insights, robust research, and seamless technology. We remain committed to supporting advisers as they navigate change, grow their businesses, and help clients live their best lives.”

According to the report, “Lonsec leads in both usage and sentiment, with strong adviser support underpinned by its robust service model”. Lonsec’s Net Promoter Score (NPS) has risen from 19 to 28 over the past five years, and 45% of surveyed advisers now rely on Lonsec’s research to make investment decisions for their clients, demonstrating strong industry reach and consistent service excellence. Through our award-winning platform, iRate^®, Lonsec delivers qualitative and quantitative analysis across more than 1,800 managed investments and listed securities, and over 480 superannuation products.

“Our team is focused on delivering research that is not only rigorous and independent, but also practical and timely,” said Peter Green, Director of Research at Lonsec. “We’re proud to see our work recognised by the adviser community, and we’ll continue to evolve our approach to meet the changing needs of the industry.”

The report also highlights Lonsec’s strategic alignment with GDG and the Evidentia Group, offering advisers a seamless connection between research, SMA implementation, and portfolio governance.

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The rise of private credit

EY has estimated the size of the Australian private credit sector to be A$188b in assets under management comprised of A$112b in business related loans and A$76b in commercial real estate loans (EY, 2024). The IMF has estimated global private credit at approximately US$2.1 trillion (IMF, 2024). This expansion has been driven by several factors, including banks’ retreat from riskier lending following the GFC.

Retail investors are following institutional investors and superannuation funds, by allocating capital to private credit as part of their portfolio diversification strategies, attracted by its historically strong risk-adjusted returns and low correlation with public markets.

Darrell Clark, Deputy Head of Research & Manager, Alternatives, Lonsec Research and Ratings, comments “Private credit can present compelling opportunities for both investors and borrowers but it also brings significant risks and challenges. Balancing opportunities with risk management is essential.’

The Lonsec approach

Foreshadowing the growth in Australian private credit funds, in early 2024 Lonsec updated its  seven-factor private markets model and the governance framework overseeing the initiation of coverage.

Lonsec currently researches and rates 28 private credit funds, 20 of which are Australian Private Credit. In contrast to the global peer group which is heavily focused on direct corporate lending, Lonsec’s Australian peer group is 55% focused on multi-sector approaches and 45% on real estate lending.

In addition to the growth seen over the past three years, Lonsec has also declined to initiate coverage on multiples of those that have been contracted.

One key component of Lonsec’s research process is robust scoring models that have been developed over time and are reviewed on an ongoing basis by senior members of the Lonsec Research team. ‘We use a seven-factor model as the foundation for research ratings, with the Product factor specifically designed to evaluate the structure of the investment product under review. Prior to our Alternatives Sector Review last year, we enhanced the Product factor within our private markets model to better capture the additional risks associated with private market funds, such as illiquidity and valuation governance’, says Darrell Clark.

Lonsec also vets all requests for coverage looking at areas of heightened risk such as governance, vertical integration and/or related party issues, overall firm resourcing including workout staff, credit quality, and portfolio diversity and, only if a product meets minimum requirements, can it move forward into the Lonsec ratings process.

The focus areas outlined in the table below represent a selection of minimum hurdles or ‘gates’ and showcase examples of managers and funds unlikely to move forward in the Lonsec rating process

Lonsec remains vigilant to evolving market dynamics and ASIC’s ongoing review of private markets, ensuring our approach aligns with industry best practices and regulatory expectations. ‘Lonsec has been providing product ratings to Australian advisers for over 30 years, with our Alternatives rating team having a broad range of private market experience across several market cycles. We are highly aware of the trust placed in us by Advisers and their clients and as such, end investors are top of mind when we evaluate and rate funds,’ concludes Darrell Clark.

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iRate® is Lonsec’s award-winning investment research portal, providing financial professionals with access to their range of financial product research, ratings and analytical tools. iRate® is powered by one of Australia’s largest investment research and consulting teams and helps to deliver investment research needs in the one portal. In addition to providing managed fund and super fund research, iRate® also offers portfolio construction and comparison tools that can help advisers streamline their processes and meet their best interest duty and compliance obligations.

Lonsec CEO Michael Wright says, ‘We are delighted to be partnering with Godfrey Pembroke during such an exciting time of business transformation for the group. In an ever changing  compliance-heavy advice landscape, it is more important than ever for licensees to provide efficient and reliable research tools to their advisers.

‘Qualitative research is at the heart of what we do at Lonsec and we have built iRate® to support the research needs of all Australian advisers. We are delighted to continue as the research and investment consulting partner for Godfrey Pembroke and by doing so, helping their advisers to have more informed and insightful conversations with their clients.’

In preparation for the exit from Insignia, Godfrey Pembroke surveyed the investment research market and Lonsec was the standout choice. Mark Fisher, CEO of Godfrey Pembroke comments ‘The Godfrey Pembroke model is largely an outsourced vendor relationship model so choosing the right vendors is key. We chose to continue our long standing relationship with Lonsec due to the depth and breadth of their research as well as the professionalism of the researchers and  analysts.’

‘During the transition out of Insignia, the support the Lonsec team provided was top notch and we are delighted to continue this relationship.’

This partnership also includes the appointment of a member of the Lonsec Investment Consulting team, to the Godfrey Pembroke Investment Committee.

In addition to iRate®, Lonsec also supports the evolving needs of licensees and advisers through its investment consulting, tailored portfolios, managed accounts and its dedicated transition consultants who assist practices across the country in transforming their businesses.

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Lonsec is offering to acquire in-house managed portfolios from advice licensees.

Leading research house and managed account provider Lonsec will work with financial advisers seeking to transition from conflicted advice models and introduce a greater degree of independence in their investment decisions.

Lonsec is offering to acquire in-house managed portfolios from advice licensees to enable them to take advantage of best practice governance principles and Lonsec’s experienced team of portfolio construction experts.

With a shift currently taking place in the advice industry in the wake of the Royal Commission into Financial Services, Lonsec said advisers are acutely aware of the need to present a professional, conflict-free advice environment for their clients.

“Advice models have come under a great deal of scrutiny by the Royal Commission as well as the regulators and the community,” said Lonsec CEO Charlie Haynes.

“The Royal Commission may have stopped short of a ban on vertically integrated or conflicted financial advice, but advisers know they need to start moving quickly in this direction to meet community expectations.”

While it is becoming increasingly unpalatable for licensees or advisers to charge portfolio management fees for in-house managed accounts, advisers are also cognisant of regulatory developments.

An empowered ASIC is investigating how platform providers ensure the integrity of managed accounts constructed by advice licensees who might lack the expertise or resources to act as specialist investment managers.

For many advisers, the question is how best to manage conflicts, either by outsourcing the portfolio construction process or introducing a greater degree of independence in their investment decisions.

Lonsec is proposing to acquire the investment management rights from existing managed account providers, enabling them to focus on the provision of advice without conflict.

Licensees have the flexibility to retain their existing branding, investment mandate and platform, or transition to Lonsec’s own professionally managed portfolios incorporating best ideas and insights from Australia’s leading investment product research house.

“An outsourced managed account solution is becoming increasingly popular, not just in order to reduce conflicts but to allow advisers to focus on their clients’ needs and aspirations while leaving the investment process to specialised portfolio managers,” said Mr Haynes.

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But as the below table shows very rarely do asset classes consistently outperform and backing last year’s winner could end up making you a loser.

The table reveals the best performing asset classes for each financial year since 2008, and shows that not every winner repeats its outperformance in the following year.

Chasing last year’s winner (financial year returns)

Source: Lonsec, Bloomberg, FE

Conversely, the table reveals that avoiding asset classes that performed poorly in the previous year can cost investors in the following year. For example, if investors had reduced their exposure to Aussie shares following a negative return in 2012, they would have missed out on one of the better performing asset classes in the subsequent two years (+21.9% and +17.3% respectively).

It’s a reminder that a well researched, diversified portfolio is better over the long term than chasing last year’s winners.

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The S&P/ASX 200 VIX Index, a measure of implied volatility in the Australian share market, closed last week at 9.79 points, falling back below double-digits and a far cry from February’s high of 22.16.

S&P/ASX 200 VIX Index

Source: Lonsec, Bloomberg

While fundamentals still provide some support for a low volatility environment, with interest rates at ultra-low levels and earnings growth generally living up to expectations, investors should be prepared for more heightened volatility in the second half of 2018.

As the chart below shows, over the past 10 years the August and September period has seen the biggest average moves in the volatility index, and this is true of both the Australian and US markets.

Average daily change in volatility index, 2008-2018

Source: Lonsec, Bloomberg

While volatility is not always a bad thing, shares are particularly vulnerable when a low-volatility environment comes to a grinding halt.

With the US Fed due to hike rates again in September, and the UK grasping for a Brexit deal ahead of the October European Summit, there are reasons to be nervous. And the fears are not only confined to developed economies: Turkey’s currency has plunged to record lows and is having knock-on effects in other emerging markets.

On the trade front, while the US-China tariff war is yet to hit developed markets hard, the negative impact is starting to creep into measures of manufacturing activity and export volumes in the US and Asia.

In other words, this is no time to be ignoring history.

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The recent round of earnings announcements shows that the five FAANG shares—Facebook, Apple, Amazon, Netflix and Google (which trades as Alphabet)—are hitting or exceeding their earnings per share (EPS) estimates, but have experienced wildly divergent share price reactions.

While the FAANG shares have largely risen together in recent months, Facebook’s violent decoupling from the FAANG growth trajectory shows it is a mistake to think of these shares as behaving as a group. While Facebook met the market’s EPS target, it undershot the consensus revenue estimate and suffered the consequences.

In contrast, Amazon reported strong EPS growth and slightly down-beat revenue versus consensus, leading to only a moderate fall in price. Netflix reported lower than expected revenue and subscriber growth and saw a small bump in its price.

While the FAANG shares may have much in common—they are all technology-related shares—they are fundamentally different businesses. What they have most in common is that they are, with the exception of Netflix, among the highest value shares in the index. When they move in the same direction they can move the market with them, but when they diverge it can leave investors wondering how meaningful the FAANG label is.

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Unlike high quality AAA-rated bonds, a BBB bond is only one or two downgrades away from ‘high-yield’ or ‘junk’ status. When the economy turns sour, these companies can quickly find themselves relegated.

At the start of 2000, the BBB-rated market was worth around US$400 billion, or one third of the total investment grade market. By the end of June 2018, this had grown to $2.3 trillion, compared to a total market value of $5 trillion (see chart below).

Globally, companies are increasingly prepared to push their debt ratios higher to fund expansion, and they have found an audience of investors keen to squeeze extra yield from their portfolios. This demand is reflected in US spreads on BBB bonds, which have moved lower and converged with AAA spreads over the past two years (see chart below).

Firms have also sought to lock in access to cheap finance for as long as they can, meaning investors are not only exposed to lower quality credit, but may also be exposed to bonds that are more sensitive to moves in both underlying yields and a widening in credit spreads. In contrast to the global landscape, Australia’s investment grade bond market is dominated by financials, meaning exposure to BBB bonds is comparatively lower.
Investment managers at the conservative end of the risk spectrum, such as pension funds and insurers, rely on the investment grade market for stable and predictable returns. But the ‘risking-in’ trend means that even the safest parts of an investor’s portfolio might not be as safe as they think, and could be exposed to ‘glittering junk’ – companies that appear to offer safe yields but are at risk of being crushed by debt when their equity value falls.

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