Lorraine Robinson

The Lonsec Investment Governance Solution (IGS) is a new capability designed to help compliance and governance teams, research functions and investment teams strengthen oversight, respond earlier to emerging risks and maintain clear, defensible audit trails.

As investment governance expectations intensify, it has become essential to demonstrate transparent, defensible processes. The Lonsec Investment Governance Solution addresses this shift directly, providing a practical and scalable way to embed governance discipline into everyday workflows. Integrated within iRate, Lonsec’s investment research platform, IGS brings together key governance indicators including ratings changes, performance and fee monitoring, and other material signals into customisable dashboards and reports. This allows governance teams to move away from fragmented spreadsheets and manual processes, replacing them with a consistent, structured and auditable approach to oversight.

The Lonsec Investment Governance Solution is suited for organisations that need to demonstrate consistent, evidence-based oversight of their approved product list or investment menu, such as financial advice licensees, platforms, trustees, investment committees, and governance teams.

Lorraine Robinson, Lonsec Chief Executive Officer, said strong governance plays a critical role in building trust with clients and members:

“Across advice licensees, platforms and trustees, expectations around governance have never been higher,” Robinson said. “Advisers and clients want to know that investment options are being monitored consistently, and decisions are made with care and accountability. The Lonsec Investment Governance Solution provides the framework and transparency that supports better decision making and greater confidence at every level.”

Anna Schofield, Head of Sales at Lonsec, said the solution reflects the growing need for confidence and reassurance across the advice value chain:

“With recent high-profile failings in our industry, the focus on investment governance has intensified and the obligation on those who manage APLs and investment menus in particular has become clearer,” Schofield said. “By embedding governance signals directly within iRate, the Lonsec Investment Governance Solution gives investment teams and advisers greater clarity and confidence in decision making, with a clear and defensible record of how and why decisions were made. Our solution delivers real peace of mind, not just for investment committees, but for advisers and their clients.”

Increasing product complexity and ongoing scrutiny of fees, performance and investment decision making have raised the bar for governance across the industry. By centralising monitoring within an existing research ecosystem, the Lonsec Investment Governance Solution helps organisations strengthen governance while reducing manual effort. This capability supports more confident adviser-client conversations and provides end clients with reassurance that their investments are being actively and transparently overseen.

Lonsec is uniquely positioned to meet this need. With qualitative research coverage spanning more than 1,900 investment products, a well-resourced local analyst team with specialist expertise in the Australian market and regulatory environment, and a rigorous investment research process refined over several market cycles, Lonsec brings a level of depth and credibility that few research houses can match. This foundation underpins Lonsec IGS, empowering advisers and their clients with greater confidence at a time of heightened regulatory scrutiny.

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In emerging markets, concentration is driven by key countries, most notably Taiwan, China and South Korea, as well as AI-related industries.

Global equity markets are becoming increasingly concentrated, with benchmark performance being driven by a smaller group of stocks, sectors and countries. This dynamic is creating new challenges for investors, particularly active managers seeking to balance risk and return.

Recent market trends show that both developed and emerging market indices are heavily influenced by a narrow set of large-cap companies, particularly within the technology sector. In developed markets, US mega-cap stocks continue to dominate index performance, while in emerging markets, concentration is driven by key countries, most notably Taiwan, China and South Korea, as well as AI-related industries.

This concentration has led to narrow earnings leadership, with a limited group of companies accounting for a disproportionate share of market returns. As a result, broader market participation has weakened, with many stocks lagging headline index performance.

For active managers, the environment presents a valuation and positioning dilemma. Many of the largest contributors to index returns are trading at elevated valuations, leading valuation-sensitive managers to underweight these stocks. This can result in performance divergence from benchmarks during periods when market leaders continue to outperform.

At the same time, rising concentration is increasing benchmark-relative risk, including higher tracking error and potential shifts in portfolio beta. These dynamics can affect how portfolios respond to market movements, particularly in rallies driven by a small number of dominant stocks.

While it remains uncertain whether current concentration levels are structural or transient, historical patterns suggest that periods of narrow leadership are unlikely to persist indefinitely. In the interim, the divergence between benchmark performance and broader market outcomes is expected to remain a key feature of global equities.

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Investment in digital infrastructure, including data centres, fibre networks and connectivity platforms.

Infrastructure is increasingly being reassessed by investors as its role expands beyond a traditional defensive allocation.

While income and diversification remain central, long‑term structural trends are positioning infrastructure as a source of growth. Rising demand linked to digitalisation, electrification and energy security is reshaping the asset class.

Investment in digital infrastructure, including data centres, fibre networks and connectivity platforms, is accelerating alongside the growth of artificial intelligence and cloud computing. Demand for these assets is increasingly structural rather than cyclical.

At the same time, electrification and the energy transition are driving greater focus on transmission and storage assets, which are critical to system reliability and typically supported by stable cash flows.

Read the full insight from Payal Vasa, Manager, Real Assets, here.

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Industry assets reached an all‑time high of $343.5 billion in February before easing to $329.7 billion by the end of March, reflecting a strong start to the year followed by a sharp equity sell‑off in March. Over the past 12 months, total ETF assets have grown by approximately 36%, highlighting the continued structural shift toward low‑cost, exchange‑traded investment vehicles.

“Global equities remained the dominant allocation over the quarter, capturing nearly half of all ETF flows”, said Chad Troja, Manager, Direct Equities at Lonsec. “Although, the allocation of flows when compared to 12 months ago have visibly shifted away from US-concentrated and hedged strategies toward broader global diversification.”

Allocation towards global equities ($6.90 billion) was followed by Australian equities ($4.15 billion) and Australian bonds ($2.73 billion), as investors balanced growth exposure with defensiveness. Global bond ETFs recorded modest net outflows, marking the weakest asset class for the quarter.

Performance was increasingly polarised. Commodities and energy‑themed ETFs led returns, supported by geopolitical tensions and supply disruptions, while precious metals also performed strongly over the rolling 12 months. In contrast, cybersecurity, crypto‑linked products and speculative growth exposures were among the weakest performers, particularly during the March market drawdown.

Active ETFs continued to expand their footprint, accounting for around 36% of Australia’s 400+ listed ETFs, while passive strategies remained a significant component of new product issuance. Thirteen new exchange-traded products launched during the quarter, with global equity exposures dominating new supply.

The quarter highlighted both the resilience of ETF demand and the speed at which market sentiment can shift. As the product universe continues to expand across active, thematic and income‑oriented strategies, dispersion in returns and flows is becoming more pronounced.

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In an environment marked by persistent inflation pressures, geopolitical uncertainty and fiscal imbalances, managers in the Unconstrained Bonds and Specialised Income sectors are increasingly allocating to securitised debt and high-yield credit. These sectors are offering comparatively more attractive risk‑return profiles than traditional fixed income benchmarks, which remain concentrated in low‑yielding segments.

Traditional bond indices capture only a narrow slice of the global fixed income universe and exclude areas such as high‑yield credit, non‑agency mortgage‑backed securities and leveraged loans. As a result, benchmark‑constrained strategies have become increasingly exposed to heavily indebted issuers offering limited upside.

By contrast, unconstrained and specialised income strategies are typically managed against a cash benchmark and have the flexibility to adjust duration, rotate between sectors, and deploy capital across a wider opportunity set. This flexibility has become an advantage amid heightened volatility.

Securitised debt has emerged as a key focus, particularly agency and non‑agency mortgage‑backed securities, asset‑backed securities and commercial mortgage‑backed securities. Agency MBS provide implicit government backing with a yield premium to investment‑grade credit, while non‑agency MBS and ABS offer higher yields backed by diversified consumer loan pools. These characteristics have made them attractive where consumer fundamentals and underwriting standards remain sound.

Private asset‑backed securities have also gained attention. Lending to asset‑backed warehouse facilities offers a yield premium relative to public markets, reflecting higher complexity and lower liquidity. These arrangements require careful structuring and deep credit due diligence, particularly around enforcement rights and lender hierarchy, to ensure appropriate compensation for risk.

High‑yield credit has also re‑entered portfolios as managers respond selectively to improved issuer fundamentals and a reduced presence of weaker credits following the expansion of private debt markets. Allocations have generally been tactical and risk‑aware, with managers avoiding deteriorating sectors and using hedging tools to manage downside risk.

As fixed income markets continue to evolve, flexibility and active management are becoming more central to portfolio outcomes. Unconstrained Bonds and Specialised Income strategies are increasingly positioned to navigate valuation constraints while seeking income, diversification and resilience in uncertain conditions.

By Michael Elsworth, Manager, Fixed Income

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While underlying adoption remains solid for many providers, several firms have flagged emerging margin pressure as AI‑related investment rises.

Global equities have entered 2026 with strong momentum, but the underlying market rotation is intensifying as investors reassess how value is captured across the AI ecosystem. While upstream capital expenditure remains exceptionally strong, parts of the software sector are facing renewed scrutiny.

Emerging markets and commodities led early‑year performance, but as high concentration in US mega‑cap technology companies persists, the brief outperformance of the equal‑weighted US index highlighted growing investor interest in broader market participation.

Hyperscaler investment surges past new thresholds

Major cloud and AI infrastructure providers have continued accelerating capital expenditure, with market expectations suggesting hyperscaler capex could exceed US$600 billion in 2026, the majority tied directly to AI infrastructure. Several hyperscalers have also turned to bond markets, a shift from historically cash‑funded investment cycles, adding leverage into the AI build‑out.

Two 2025 themes are also persisting:

• Circular financing within the AI supply chain is making true end‑demand harder to interpret.
• Faster GPU depreciation cycles are bringing earnings drag forward as hardware turns over more quickly.

SaaS faces its sharpest challenge yet

The most significant shift in early 2026 has come from the software and data‑platform sector. Following Anthropic’s release of agentic “co-work” tools capable of automating multi‑step workflows, markets reacted sharply. The S&P 500 Software & Services cohort sold off materially and remains lower year‑to‑date, with investors questioning the durability of subscription‑based revenue models.

Analysts note that AI agents may erode the value of traditional per‑seat pricing and compress margins by shifting execution toward APIs and outcome‑based compute. While underlying adoption remains solid for many providers, several firms have flagged emerging margin pressure as AI‑related investment rises.

A clearer divide between upstream and downstream

The landscape so far in 2026 points to strong upstream cash flows and accelerating capex, contrasted with uneven monetisation downstream and deeper questions about how AI is reshaping the economics of software. Investors are increasingly focused on which parts of the value chain capture returns, particularly as AI agents become the marginal “user.”

The bottom line

Global equities have opened the year with higher capital intensity, rising leverage in AI infrastructure, and a sharper lens on the sustainability of software pricing models. Selectivity is becoming more important as markets test the resilience of downstream business models in an agent‑driven environment.

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Hybrid securities have traditionally offered attractive yields but come with higher credit and tail risk due to their subordinated position in the capital structure. APRA noted that hybrids have not performed as intended during overseas banking crises, highlighting challenges around complexity, legal ambiguity, and the disproportionately high retail ownership in Australia.

With hybrids set for removal as regulatory capital instruments, market participants have been quick to propose alternatives. Options currently emerging include:

• Government, corporate, and high-yield bonds: These provide greater capital stability and more predictable payments than hybrids, though they do not offer franking credits.
• Offshore AT1 and corporate hybrids: Recent deals, such as UBS’s September 2025 AT1 issue in Australian dollars, indicate continuing demand, though these securities fall outside APRA’s oversight and generally do not provide franking credits. Corporate hybrids also exist but operate in a less regulated environment.
• Subordinated debt (Tier 2): APRA has directed issuers toward subordinated bonds as a more reliable capital instrument. With an established ~$120 billion market, substantially larger than the domestic hybrid market, subordinated debt is emerging as the closest structural replacement. As a debt security, it does not deliver franking credits.
• Managed funds: Specialised Income and Specialised High Income funds offer diversified solutions that can approximate the risk/return profile of hybrids while providing professional credit selection and liquidity management.

The phase-out represents a fundamental change for investors who have relied on hybrids for income generation. While the franking benefit will be harder to replace, a broad spectrum of fixed income and multi-asset alternatives are available, each carrying different risk characteristics and tax considerations.

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Private loans exhibit several ‘self‑liquidating’ characteristics that generate ongoing cash flows, such as high margins (typically paid monthly), shorter maturities (i.e., three to five years), amortising structures in some segments, and pre-payment options. These characteristics all support the capacity to meet periodic redemptions and distributions.

Liquidity management is further supported by portfolio design and fund operations. Managers commonly ‘ladder’ loan maturities to create steady principal repayments, net investor applications/redemptions within larger pools, maintain a defined liquid asset sleeve (often with hard limits), and utilise modest debt facilities both for flexibility and, in some cases, return enhancement.

Fund structures typically align asset and investor liquidity via quarterly redemption windows capped as a percentage of NAV, with provisions to defer or, in extreme circumstances, suspend redemptions if required to protect investors’ interests.

Global private debt strategies typically introduce currency‑hedging cash flow demands, so managers often stagger hedges and rely on domestic fund tax elections (e.g., AMIT/TOFA) to smooth out hedging impacts, though sustained currency moves can still temporarily affect payouts.

The paper also flags areas of investor focus, including the implications of payment‑in‑kind (PIK) features on income timing and default severity, and the potential for cyclical rises in defaults to constrain distributions, risks that can be mitigated by experienced credit selection and diversification across issuers, industries, and regions.

While private debt remains an illiquid asset class suited to a patient investment approach, the combination of self‑liquidating loan features, portfolio construction practices, explicit liquidity sleeves and facilities, and fund‑level redemption mechanics can materially improve liquidity management in ‘evergreen’ vehicles.

Overall, liquidity risk can be managed relatively well with private debt, as long as the above mechanisms and activities are in place, which is a strong focus in Lonsec’s review of private debt funds.

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Peter Green

Lonsec has released new analysis of Australian equity market performance over the 2025 calendar year, highlighting a challenging period for growth strategies, strong dispersion among active managers, and renewed momentum in the small‑cap sector. The findings also point to meaningful structural shifts driven by superannuation fund flows and the continued rise of passive investing.

Growth underperforms as markets rotate

Lonsec’s review shows that growth strategies lagged throughout CY25 as investors rotated away from structural growth and toward resources and value-oriented stocks.

“We saw a clear shift in market leadership this year,” said Peter Green, Director of Research at Lonsec.

“Technology and healthcare sectors contracted –19.1% and –23.9%, while resources and materials delivered impressive gains of +36.2% and +37.5%. This rotation significantly impacted growth managers’ relative performance.”

Small caps enjoy a strong recovery

After several muted years, small caps delivered excellent returns, with the S&P/ASX Small Ordinaries Index rising 24.96%.

“Small caps finally had their day in the sun,” Green said. “Gold miners were a standout, buoyed by a 65% increase in the spot gold price.

Reporting season drives investor behaviour

Lonsec notes heightened volatility around the February 2025 and August 2025 reporting periods.

“We observed large price reactions when company results differed from expectations,” said Green.

“Managers have been more active leading into reporting season as earnings guidance becomes an increasingly important driver of performance.”

Structural market shifts continue to evolve

The research also highlights long‑term structural changes influencing market dynamics:

• Top industry super funds account for around 12% of capital in the domestic equity market (based on 25% of member balances allocated to Australian shares).
• Passive investing continues to accelerate, shaping index composition and liquidity.
• IPO activity remained subdued, though Lonsec expects more listings in 2026 as market conditions improve.

“These structural forces are reshaping the Australian equity landscape,” Green said.

“They affect everything from liquidity to price discovery and create both headwinds and opportunities for active managers.”

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Darrell Clark

Private credit has emerged as one of the fastest-growing segments of Australia’s capital markets, now estimated at around A$200 billion. Its rise reflects a pullback in traditional bank lending and strong investor appetite for yield. The release last month of ASIC Report 814: Private Credit in Australia (REP 814) has brought renewed focus to the sector’s governance, transparency, and investor protection standards.

While REP 814 identifies several areas of concern, including opaque fee structures, related-party exposures, and valuation practices, it also acknowledges that “private credit, done well, has a valuable role to play in the Australian economy.” Lonsec Research and Ratings supports this view and believes that higher standards are both achievable and essential for long-term investor confidence.

“REP 814 highlights the sector’s growing importance and the need to lift standards around governance and transparency”, said Darrell Clark, Deputy Director of Research at Lonsec Research and Ratings. “Lonsec’s research process already aligns closely with these principles, supporting advisers in identifying well-structured, high-quality products.”

Lonsec’s 7-factor ratings model includes specific assessments that align with the issues raised in REP 814:

• Opaque fees: Assessment included in the ‘Fees’ factor including the overall quantum of fees and fairness.
• Related party exposures or conflicts: Assessment included in the ‘Business’ factor within ‘Business Governance’ and/or ‘Portfolio Construction’ within the ‘Process’ factor.
• Valuation practices: ‘Valuation Governance’ sub-factor included in the ‘Product’ factor.
• Liquidity: Liquidity assessment including a comment on mismatches, disclosure, and redemption mechanisms included in the ‘Product’ factor.
• Investor disclosure: Assessed in the ‘Transparency’ sub-factor included within the ‘Product’ factor.

Funds that fall short in these areas receive lower scores, while those demonstrating strong governance and disclosure are recognised accordingly. Lonsec’s overall opinion and rating commentary reflect a product’s relative strengths and weaknesses versus its peer group.

Earlier this year, Lonsec Research and Ratings published Private Credit: Balancing Opportunity and Risk in a Growth Market, outlining minimum gates for managers seeking a rating. Where these standards are not met, Lonsec will not proceed to coverage. This ensures that only managers demonstrating sound practices are considered.

Australia’s private credit sector is still maturing. Strengthening governance, transparency, and conflict management will benefit investors and bring the sector closer to global standards. Lonsec Research and Ratings will continue to lead through its research methodology, supporting advisers and investors in making informed decisions.

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