Retailing Research: From Big-Box to Farmer’s Market?
Asia Independent Research Providers’s (AIRP) Ed Stockreisser and Shan Han discuss the market for research, their new solution SeedAlpha, and predict how regulatory and economic pressure will reshape buy-side consumption.
As institutional investors and the bulge bracket brokers who service them discuss the ramifications of potential unbundling rules in the UK, independent research providers see an opportunity to gain market share providing a diverse, specialised analysis.
There have been four key developments in research provision over the last five years: the decline in commissions; the decline in payment for research; an arguable decline in the quality of the sell-side research; and a decline in the hard dollars used to pay for research, handle/corporate access and related services. Quality analysts are more likely to leave the sell-side for the buy-side or to become independent as sell-side firms downsize senior analysts positions.
A central theme in the regulatory discussions is the inherent conflict of interests in bundled models and subsidised research models, which has begun to sway buy-side opinion. Lack of cost transparency and reduced service quality explain the current pressure on research models, including those from the FCA.
Many of the managers we speak to are wholly unprepared to assign a value to research. The buy-side focus is largely on how they use research in their investment activities, effectively ignoring the research that is being discarded. The Boston Consulting Group estimates that as little as 10% of research is read. A ban on using client commissions to pay for research and corporate access entirely from 2017 opens up a new paradigm for the consumption and creation of research.
With the fragmentation of the research market, the cost to get research in front of the right consumers, or the cost for the fund managers to go out and access this research, is increasing. This is an opportunity for technology to shorten that gap and make it more efficient. Our aim is to increase the value of research from the way that it’s used across the team. The problem the buy-side has is with assigning value to research, but the more people that use one piece of research, the more you can actually justify a higher valuation. Once a firm has established some sort of budget or spend on research, it will change the way that they consume research.
Creating a research price index provides an indicator as to what a piece is roughly trading at in the market, bearing in mind that research has no value until it is read and that it has a different value for each reader. Compliance audit trails are also built in to track research budgets from the CIO down to individual analysts and teams.
One of the biggest buy-side pain points is that there is so much research on offer that even if they take research from five bundled brokers, they still receive 400 emails a day: something like an unlimited buffet of junk food. All the buy-side really wants is: A) a way to find the best research from existing and best-in-class providers and B) to manage that in one platform without having to go through broker portals, search emails, use Bloomberg and a range of external different sources.
In an effort to reflect a higher value of research consumption, we are charging the buy-side to join the platform instead of the research providers because ultimately what we care about is investors having access to better research. This may mean sell-side research, but as fragmentation occurs, investors want the best research on behalf of clients and we leave it to the regulators to determine how that is paid for.
A more diverse research ecosystem is a hoped-for outcome, as many independent research providers (IRPs) do not have sales teams as is true for some regional brokers. If their research can be purchased side-by-side with larger firms’ research, it can potentially create a competitive advantage within their niche.
Despite bundled financing, large research providers face cost pressures, which will likely discourage exhaustive coverage in favour of specialised focus on core competitive advantages. With the exception of the biggest brokers, who will continue to fund quality research in all areas despite unbundling, the majority of research providers will likely become specialists. These disparate providers will need a glue to bind them together – a table for everyone to sit at.
More than ever before, there must be a justification to spend client commissions on research, yet rarely does one piece of research lead to an investment decision. Over the course of reading possibly hundreds of pieces analysts eventually form an investment idea. Manually tracking that process is virtually impossible, but we can technically automate much of the tracking to justify how the idea develops.
At present, there is pressure on fund managers from the regulators, clients and economic forces. In turn, the sell-side will be pressured into changing. Eventually, perhaps in 10 years’ time, investors will look back at how research was being done now and be grateful it is not done that way anymore.