2010 – A Better Year for Alternative Research


New York, NY – As we head into the New Year, many people we have spoken with in the research industry, have expressed the hope that 2010 will better than 2009.  And while it is difficult to make predictions about any specific research firm, the team at Integrity Research Associates is fairly confident that 2010 will be much better for the U.S. alternative research industry as a whole than was experienced in 2009.  The following is a review of Integrity’s outlook for the upcoming year.

Rebound for Research Revenues   

According to Integrity’s estimates, sales of alternative research fell 17% from 2008 to 2009 reflecting most buy-side firms’ cutting internal analytical staff and scaling back their spending on external research to support them in the wake of the credit crisis. 

In 2010, we project a 7% rebound in U.S. alternative research revenue, from $1.67 bln in 2009 to $1.79 bln as equity commission budgets are expected to rise and as buy-side firms become willing to spend more on third-party research following a stellar performance in the stock markets in 2009. 

However, our projected gain for 2010 reflects a rather modest uptick caused by the cautiousness of retail investors who have, by in large, have stayed out of the equity markets even as the stock markets soared in 2009.  We suspect many of these investors will abstain from jumping back into equities until they regain confidence in the economy – a development that is unlikely to take place until they see a prolonged improvement in the employment situation.  We suspect that this dynamic will keep mutual fund demand for third-party research rather restrained over the coming months.   

Growth in Number of Firms Continues

Based on Integrity’s ResearchSelect database, at the end of 2008 there were 989 independent investment research firms in existence in the United States, which generated $2.03 billion in research sales.  While we have not yet tallied the number of independent research firms at the end of 2009, we suspect that the number of new entrants into the market outpaced the number of firms leaving the business, despite a difficult year in the research industry.  Consequently, we would guess that the number of research firms continued to expand last year.

Will this trend continue in 2010?  We expect so, particularly as revenues are projected to rebound and as buy-side investors have become more and more accepting of alternative research in recent years.   In addition, the fact that top notch sell-side analysts have become more comfortable with the prospect of setting up their own alternative research businesses as a potential career option, leads us to believe we will see a number of new independent research firms formed by former sell-side analysts in the coming twelve months.

Employment Expected to Pick Up

Given our view that alternative research revenues will rise in 2010, and the number of firms should increase, we also expect that the employment outlook will improve in the alternative research industry in the coming year – particularly following the scaling back at some research firms in 2009.

However, the market for high quality analysts should remain relatively hot in 2010 as regional brokerage and bulge bracket firms have bid up the price of talent in the past twelve months.  Consequently, we suspect that independent research firms will be forced to offer more lucrative compensation packages to lure good talent to join them.

New Research Models

The team at Integrity Research is regularly asked if there are any new exciting types of research models that are likely to evolve in the near-term.  The answer for 2010 is “yes” and “no”.  While we have not discovered “the next big thing”, we have identified a couple of old research ideas that have been reinvented which might catch on.  This includes:

  1. Timely / Cost Effective Surveys:  Two of the largest problems limiting buy-side investors’ use of primary survey research have been the time (number of interviews) required to achieve predictive results, and the cost of conducting quantitative surveys.  In the past few months we have met with a few research firms which have come up with unique approaches to decrease the number of interviews necessary to generate investable results – a development which should reduce the cost of conducting these surveys.
  2. ESG Redux:  Environmental, Social, and Governance (ESG) research – the offspring of Socially Responsible Investing (SRI) research – has started to catch a tailwind which could prompt more widespread use in the coming years.  Part of this is political as governmental forces could create actual financial costs for companies that do not meet certain standards for carbon emissions, etc.  However, other issues are market driven as the recent credit crisis has illuminated the importance of strong governance practices to the underlying riskiness of companies’ share prices.
  3. Industry Consultants for Buy-Side:  Another idea which is not new, but which is picking up steam in the research business is the concept of enabling investors to better access the unique domain expertise of industry consultants and helping those consultants produce actionable investment ideas from their expertise.  In its most elementary form, expert networks like GLG, Coleman, and Guidepoint Global have all created a thriving business out of connecting investors with industry experts.  However, the level of translation provided by these firms to turn this deep expertise into actionable investment ideas has been limited.  In addition, firms like Instinet, Goldman Sachs’ Hudson Street platform, and Merrill Lynch’s Open Minds initiative have all had varying degrees of success in working with well-known industry consulting firms and helping them leverage and market their expertise to the institutional investor community.


Developing Business Models

Another question we get asked regularly is whether we have seen any business models which are increasing the commercial success of research providers.  Again, the answer is “maybe”.  The following are a few models which seem to be gaining traction in the alternative research space.

  1. Investment Banking:  The obvious model that is being considered by an increasing number of alternative or independent research firms is adding investment banking or M&A advisory services.   This is particularly gaining favor with fundamental research firms that have also developed strong relationships between their research analysts and company management.  Of course, adopting this model means a research firm will inherit all of the conflicts of interest that the sell-side has faced for decades.  However, a number of research providers are willing to accept these conflicts for the commercial payoff that they expect to generate.
  2. Growth of Trading Desks:  As we have mentioned a few times in the past few months, a number of alternative research firms have recently, or are currently considering adding trading desks to their research operations.  These firms are not doing this merely to make it easier for their clients to pay them (though this is a part of the rationale).  In many instances, alternative research firms feel that they will be paid more for their research if it is bundled with trading than if it were offered solely on an unbundled subscription basis.
  3. Asset Management:  Another old business model which may be getting reconsideration by firms in the alternative research industry is asset management.  The big difference is that today there are new ways to do this rather than setting up a managed accounts business, or setting up a mutual fund or hedge fund.  A few weeks ago we wrote about one research firm (Reidel Research) which is partnering up with sponsors to set up and market a UIT and ETF based on its research.  Other firms are looking into creating indices around their research which can be used as the basis for investable products. 
  4. Pricing Analysts:  One brand new business model which might take off in 2010 is being tested by independent research firm Access 342.  This is the use of an auction mechanism to enable institutional investors to determine the price for limited access to certain highly regarded analysts.  This model is in direct contrast to firms that are looking to bundle their research with trading.  And while the uniqueness of this model has made it difficult to get this idea off the ground as both analysts and clients have to be taught about the benefits of this new approach, early indications suggest that using the auction as a research price discovery mechanism might gain considerable traction.  We will write more on this topic in the coming months.

For more information on any of these forecasts, trends, or developments please contact Michael Mayhew at Michael.Mayhew@integrity-research.com or 646-786-6859.



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