New York, NY – Despite the fact that various studies indicate that few active money managers consistently outperform the major market indices, many long only asset managers continue to build up their stock picking capabilities by investing in their internal research staffs rather than relying on sell-side research.
Based on a variety of factors, the team at Integrity Research expects that institutional investors will expand their spending on their equity research teams by close to 29% from $5.8 billion in 2006 to $7.4 billion by 2011, due to the impact of commission transparency, unbundling, and increased competition for buy-side analysts.
For example, Fidelity has added more than 120 analysts since 2005, bringing the total number of equity analysts to more than 340. Besides hiring more analytical help, the firm has also started hiring more experienced analysts. Fidelity has also increased the length of time that analysts are assigned to specific sectors in an effort to help them understand these sectors better.
Janus Capital Group has increased the number of equity analysts under its employ by 25% from 40 analysts with an average of six years of experience in 2003 to more than 50 analysts with an average of more than nine years of industry experience today. One way Janus has tried to encourage analysts to stay on at the firm has been to put analysts in charge of two funds, Janus Global Research and Janus Research.
Another firm that has expanded its internal research capabilities in recent years is Franklin Templeton Investments, where the number of investment professionals has surged almost 70% to more than 400 between 2001 and last year.
MFS Investment Management has also increased the size of its U.S. equity-research team — by close to 25% over the past few years. In an effort to keep good analysts, MFS has tied their analysts’ compensation to their funds’ longer-term performance. Consequently, some of their best analysts are paid on par with their portfolio managers.
What do these trends mean for the equity research industry? We think it will continue to change the kind of sell-side and alternative research products that the buy-side is willing to pay for.
In fact, our discussions with both long only asset managers and hedge funds indicate that channel checks, market research, access to industry experts, and search based tools are all in much higher demand than traditional fundamental company analysis as analysts look for proprietary data and insight to include as part of their analysts’ research processes.
However, some things that have not changed much has been the buy-side’s appetite for good trading ideas, management access, conferences, analyst access, and professional sales coverage.
Unfortunately, smaller buy-side firms have not had the resources to build up their internal research teams. Consequently, many of these firms have been scrambling to be able to compete with their larger, more research rich, brethren — a trend that could bode well for the independent research providers, and some of the more focused research boutiques.