Lonsec Research Pty Ltd (Lonsec), and its predecessors Lonsec and Lonsdale Securities, has been a provider of investment research since 1993. It has an experienced and specialist research team, which draws on a robust research process to undertake in-depth assessments of financial products.
Lonsec’s research process follows a structured framework of assessing a range of qualitative and quantitative factors and then scoring these attributes relative to other financial products within the same sector.
The result of this process is the rating assigned to a financial product. The information below is to assist you in understanding what these ratings mean.
Lonsec’s approach to investment research of managed products is premised on the belief that managing money is a combination of ‘art’ and ‘science’ and that there is more than one way to manage money; there are, however, a number of critical ingredients that combine to produce a quality financial product.
The rating system designates financial products under the categories of Highly Recommended, Recommended, Investment Grade, Fund Watch, Redeem and Screened Out. These ratings reflect Lonsec’s degree of conviction in the financial products’ ability to generate risk adjusted returns in line with relevant objectives.
The Highly Recommended rating indicates that Lonsec has very strong conviction the financial product can generate risk adjusted returns in line with relevant objectives. The financial product is considered a preferred entry point to this asset class or strategy.
The Recommended rating indicates that Lonsec has strong conviction the financial product can generate risk adjusted returns in line with relevant objectives. The financial product is considered an appropriate entry point to this asset class or strategy.
The Investment Grade rating indicates that Lonsec has conviction the financial product can generate risk adjusted returns in line with relevant objectives. However, if applicable, Lonsec believes the financial product has fewer competitive advantages than its peers.
The Fund Watch rating indicates that no new investment into this financial product is recommended. A significant change has occurred with the financial product and a detailed assessment of the change is needed and / or series of rectifying actions required prior to this rating being changed.
The Screened Out rating indicates that Lonsec currently does not have conviction that the financial product can generate risk adjusted returns in line with relevant objectives. The financial product currently has insufficient competitive advantages relative to its review peer group (if applicable). Redeem
The Redeem rating indicates the financial product is no longer considered worthy of investment for any time period and investors should immediately redeem units from the financial product, subject to seeking financial advice. An adverse development has taken place that is considered detrimental to the interests of investors.
The Approved rating indicates that Lonsec believes the financial product can generate risk adjusted returns in line with relevant objectives. If applicable, the financial product provides an adequate means for investors to gain exposure to the underlying assets.
The Not Approved rating indicates that Lonsec believes the financial product cannot generate risk adjusted returns in line with relevant objectives. If applicable, the financial product does not provide an adequate means for investors to gain exposure to the underlying assets.
Financial Products Withdrawn from Research Process
The following are statuses, not ratings. They articulate the circumstances under which a financial product was withdrawn from Lonsec’s researched universe.
The Discontinued Review status is applied where a fund manager that has approached Lonsec and agreed to tender a financial product for assessment, subsequently elects to discontinue participating in the Review prior to its completion for any reason, other than the financial product being closed or unavailable to retail investors. The Discontinued Review status will be published on the Lonsec website.
The Ceased Coverage status is applied to financial products where fund managers withdraw from the Lonsec research process after the research process has been completed.
Closed / Wind Up
The Closed / Wind Up status is applied to a financial product when the fund manager advises Lonsec that the financial product is being wound up and the capital is to be returned to investors.
ASIC’s updated Regulatory Guidance to Research Houses (ASIC RG79) requires that Lonsec publishes a rating for those financial products considered sub-investment grade. This applies to financial products that are new to Lonsec’s research process and have undergone the full due diligence process. Fund Reviews and Fund Viewpoints will not be published for financial products rated as ‘Screened Out’. Only Fund Profiles containing factual information and the Screened Out rating will be published. A confidential draft rating report summarising how the financial product was assessed against each of Lonsec’s rating criteria will be provided to the fund manager, for internal use only.
Lonsec considers the primary purpose of investing in equities is to generate dividend income, capital growth or a combination of both and it is this risk versus reward relationship that determines the attractiveness of an investment. For any given company, the level of risk to capital and the level of risk to income are not necessarily the same. In order to differentiate between these inherent risk, Lonsec’s equity research sets out to capture and highlight the various characteristics of each stock in a simple, yet effective manner. This approach has been tailor made for the financial advice channel and sets out to assist financial advisers in selecting the right stock for the right client.
Lonsec’s proprietary quantitative models utilise a database comprising a wide range of historical and forecast data points to determine and classify the Income and Growth risk profile for each security in the ASX200. The quantitative model will derive a suggested Approved or Not Approved rating by combining the Income and Growth Risk ratings for each stock.
An approved rating indicates that lonsec believes the stock is of ‘investment grade’ quality, meaning we believe the long-term income and / or growth potential of the company outweighs the potential risks
The not approved rating indicates that lonsec believes the stock is not of ‘investment grade’ quality, meaning we believe the potential risks outweigh the long-term income and / or growth potential of the company
A ceased coverage rating indicates that the stock is no longer included in the s&p/asx 200 and hence lonsec has ceased coverage of the stock. new stocks coming into the s&p/asx 200 will be initiated with an approved or not approved rating within 20 business days of inclusion in the index
As well as an overall research rating, Lonsec’s quantitative model will derive a risk profile based on the risk to Income or Growth. This is achieved quantitatively by screening each stock by a bespoke set of factors relevant to each risk factor, resulting in stocks being allocated to four distinct ‘buckets’ – Low, Attractive, At Risk or Inferior. Lonsec’s assessment of a company’s Income Risk profile follows a structured framework of assessing ten key financial metrics to arrive at an overall Income risk rating for the company. This risk rating is combined with the expected dividend yield of the company, over the medium term, to classify the company into one of the following categories:
Lonsec’s assessment of a company’s Growth Risk profile follows a structured framework of assessing ten key financial metrics to arrive at an overall Growth risk rating for the company. This risk rating is combined with the expected earnings growth of the company, over the medium term, to classify the company into one of the following categories:
Lonsec’s listed income research follows a structured framework to derive an investment rating and risk assessment. The investment rating is a long-term assessment which remains relatively static, though will be upgraded or downgraded should our ‘investment grade’ view change. The risk assessment is more dynamic, and may vary more frequently throughout the term of the issue. In forming our investment rating, we have assumed that positions are held to maturity and therefore will continue investment coverage through to maturity.
Each listed income investment under coverage is assigned either an ‘Approved’ or ‘Not Approved’ rating:
The ‘Approved’ rating indicates that Lonsec believes the security is of ‘Investment Grade’ quality, meaning we believe the security will pay all distributions in the term to call and holders will receive face value on maturity, such that the income potential outweighs the potential risks.
The ‘Not Approved’ rating indicates that Lonsec believes the security is not of ‘Investment Grade’ quality, meaning we believe the potential risks outweigh the long term income potential of the security.
These recommendations are made with reference to the Lonsec risk assessment, and with consideration to the relative attractiveness of the expected return. The potential return refers to the interest margin on offer over the relevant benchmark rate and any other investment return which may include conversion discounts, in-built call options, entitlements to IPOs and future step-ups in the margin.
Following an assessment of the risks and metrics described above, a risk ranking score is assigned to each of the six risk categories. The risk scores are assessed on a scale of 1 to 5, with 1 implying low risk and 5 high risk. Adding the scores of each category derives a total risk rating score out of 80, which represents the overall risk rating for the security. Out of the six risk categories, Financial risk is the heaviest weighted category and accounts for 43.75% of the total risk score. Structural risk follows with a weighting of 25.00% and Maturity risk at 12.50%. Liquidity, Industry and Volatility risks are the lowest weighted categories at 6.25% each. The risk rating categories range from Low to Speculative, and are described below:
A low risk assessment indicates that a majority of the risks are rated as low and the overall risk score is below 34 which indicates strong credit quality.
A moderate risk assessment indicates that a majority of the risks are rated as moderate and the overall risk score is between 35 and 50 which indicates good credit quality.
A high risk assessment indicates that a majority of the risks are rated as high and the overall risk score is between 51 and 69 which indicates low credit quality.
A speculative risk assessment indicates that a majority of the risks are rated very high and that the overall risk score is between 70 and 80 which indicates the issue is below investment grade and has speculative qualities.