Buy-Side Sees Value of Sell-Side Analysts Falling

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New York, NY – According to a recent study conducted by investment consulting firm Greenwich Associates, buy-side investors believe that the value of the service traditionally provided by sell-side analysts has fallen in 2011 for the second consecutive year – to less than one quarter of the overall commission pie that is paid out for research.  Partially replacing this decline, buy-side survey participants felt that the value of access to corporate management increased to over one fifth of the amount allocated to research commissions.

Between November 2010 and February 2011, Greenwich Associates conducted its annual survey, interviewing 217 US equity fund managers about the research and sales services they received.

As mentioned in yesterday’s post, Greenwich Associates estimates that the buy-side paid out approximately $6.8 billion in commissions for investment research, down 3% from the $7 billion spent on research in 2009-2010.

One of the most interesting findings in the 2011 survey was that for the second consecutive year, survey participants felt that sell-side analyst service was not as valuable as it was in the prior period.  In this year’s survey, the buy-side felt that analyst service was worth 24% of the $6.8 bln in commissions allocated to research – down from 27% in 2010 and 28% in 2009. 

To some extent, this trend might reflect the continued brain drain from the sell-side as top notch Wall Street analysts have moved either to the buy-side or have started up their own boutique independent research firms.  Despite this decline, buy-side fund managers continue to see analyst service as the most valuable aspect of the research product.

Proportion of US Equity Research Commissions

 

2011 2010

2009

Analyst Service

24%

27%

28%

Access to company management

21%

19%

18%

Research Conferences

12%

14%

12%

Sales Service

12%

12%

12%

Individual company or industry studies

9%

9%

10%

Economic Analysis and portfolio strategy advice

9%

8%

9%

Thematic Investment ideas or specific stock recommendations

7%

8%

7%

Other, including global research

3%

1%

3%

Customized or bespoke research

2%

1% 2%

According to the Greenwich survey, approximately one third of the research commission budget is used to pay for meetings with company management – either directly (21% of the research spend) or via research conferences (12% of the research commission pie).  This is up slightly over the past few years, as investors said that direct access to company management was worth 19% in 2010 and 18% in 2009.  The value of research conferences has remained relatively stable in the past few years from 12% to 14% of all research commissions paid.

The importance of international developments over the past year had an impact on how the buy-side valued sell-side research.   The amount of commissions allocated to macroeconomic research and portfolio strategy rose to 9% in 2011 from 8% in 2010.  Also, the value ascribed to global research rose from 1% in 2010 to 3% of the research commission pool in 2011.  Buy-side investors also felt that custom research was more important in 2011 – totaling 2% of the research commission pie, up from 1% in 2010.

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