New York, NY – Historically, numerous industry surveys have shown that one of the most important aspects of sell-side investment research to institutional investors has been access to public company management. However, a recent study by Integrity Research Associates has revealed that access to company management IS NOT a terribly important factor to the buy-side when selecting a research provider – at least when picking their favorite small cap research suppliers.
Importance of Corporate Access
In the fourth quarter of 2009, Integrity Research interviewed 141 U.S. mutual fund, hedge fund, and pension fund portfolio managers and analysts who use external sources of small cap research in order to identify trends and demands in small cap usage and determine who they saw as their top US small cap research providers.
Integrity Research defines a research firm as a “small cap research specialist” if more than 45% of the companies covered by that firm has a market capitalization of less than $2 billion USD. Among the 141 survey participants, 33% of the respondents were mutual fund analysts, 29% hedge fund analysts, 29% pension fund analysts and 9%, other.
As part of this survey, we asked the buy-side to rate the importance of fourteen different “value metrics” in their selection of the small cap research providers they used from 1 (not important at all) to 5 (extremely important).
Small Cap Research Value Metrics
|
Value Metrics |
Mutual Fund |
Hedge Fund |
Pension Fund |
| Depth of Research Reports | 4.17 | 4.15 | 4.10 |
| Access to Financial Models | 4.13 | 3.13 | 4.27 |
| Company / Industry Insights | 4.09 | 4.10 | 4.24 |
| Responsiveness to Client Requests | 3.66 | 3.40 | 3.32 |
| Timeliness of Ideas | 3.49 | 3.55 | 3.39 |
| Analytical Expertise / Quality | 3.47 | 4.45 | 2.95 |
| Access to Analysts | 3.30 | 3.08 | 3.10 |
| Cost / Value for Money | 3.23 | 3.55 | 3.49 |
| Industry Conferences | 3.15 | 2.86 | 2.73 |
| Access to Company Management | 3.06 | 3.03 | 2.68 |
| Institutional Sales Coverage | 2.96 | 2.85 | 2.78 |
| Size of Coverage Universe | 2.74 | 2.48 | 3.12 |
| Custom Research Capabilities | 2.64 | 2.28 | 2.29 |
| Performance of Recommendations | 2.40 | 2.55 | 2.83 |
As you can see from the table above, the buy-side rated Access to Company Management as a relatively unimportant part of their research selection process, with Mutual Funds rating it 3.06 or 10th out of 14 metrics; Hedge Funds rating it 3.03 or 9th out of 14 metrics; and Pension Funds rating it 2.68 or 13th out of 14 metrics.
Corporate Access and Customer Satisfaction
However, further analysis revealed that Access to Company Management is even less important to users satisfaction with small cap research providers than the data above suggests. As part of our survey, we asked buy-side investors to identify their top five providers of small cap research, and then to rate these providers on each of the fourteen metrics listed above. As part of our survey, we also asked participants to rate their Overall Customer Satisfaction of their favorite small cap research providers.
After collecting all of this data, we ran a correlation of survey participants’ ratings on each of the individual value metrics against their ratings on customer satisfaction. The table below presents these correlations.
Correlation of Value Metrics Versus Customer Satisfaction
|
Research Value Metrics |
Correlation with Overall Satisfaction |
| Size of Coverage Universe | 98.186% |
| Timeliness of Ideas | 97.992% |
| Depth of Research Reports | 97.896% |
| Unique Company/ Industry Insights | 97.872% |
| Performance of Recommendations | 96.687% |
| Analytical Expertise/ Quality of Analysts | 96.154% |
| Access to Analysts | 93.210% |
| Custom Research Capabilities | 36.081% |
| Access to Financial Models | 35.070% |
| Quality of Institutional Sales Coverage | 30.589% |
| Cost / Value for Money | 22.34499% |
| Responsiveness to Client Requests | 13.54355% |
| Industry Conferences | 4.06499% |
| Access to Company Management | -4.51989% |
What this table shows is that, based on investors’ actual ratings of their top research providers, Access to Company Management was the least important factor, and it was actually negatively correlated with Customer Satisfaction. Further statistical tests proved that the quality of a research provider’s Access to Company Management service was not related AT ALL to buy-side users’ ratings of their satisfaction with their top small cap research providers.
Cost of Doing Business?
This comes as somewhat of a shock based on the results of countless Institutional Investor surveys in recent years which have consistently shown that Access to Company Management was one of the most important aspects of sell-side research.
However, we believe our survey results can be explained as follows. First, Access to Company Management is seen by investors to be of average importance – albeit less important than many other factors when selecting a small cap research provider.
In addition, Access to Company Management was not important at all in explaining how satisfied investors are with their top research providers. In other words, Access to Company Management is not a factor which differentiates or sets one small cap research provider apart from their peers.
Part of this could be due to the fact that everyone now offers management access services to buy-side investors, and few clients can see a huge difference in quality between these corporate access services. Consequently, we think that corporate access remains an important cost of doing business (investors have come to expect the service), but it is not an offering that can really enhance a clients satisfaction with a small cap research product.
What This Means for Research Firms
Thus, we are not suggesting that research providers shut down or scale back their management access offerings. However, we are saying that corporate access alone will not win over institutional investors. Instead, investors value sell-side or independent research providers that offer broad coverage, timely and profitable investment ideas, deep research reports that supply unique company and industry insights, and access to high quality and experienced analysts.