Greenwich: No Relief For the Weary


Newsflash: Eighty-one percent of the buy-side institutions participating in Greenwich Associates’s 2013 U.S. Equity Investors Study said U.S. equity market turnover will fail to rebound to pre-crisis levels by 2014.  Oh, really?  Tell us something we don’t already know.

The latest Greenwich Associates U.S. equity survey doesn’t offer much encouragement to those in the research trenches: equity commissions won’t benefit from the exodus from the bond market.  We think that Greenwich is a trifle too downbeat in the short run, but agree that the longer term outlook is bracing.

Greenwich released its report “U.S. Equities: Five Reasons Why the Great Rotation Might Not Be So Great” last week based on surveys conducted from December 2012 and February 2013 of portfolio managers and traders at U.S. asset managers, mostly focused on large long-only managers.

Last year’s report estimated that U.S. institutional equity commissions had dropped to $10.9 billion from the$13.9 billion peak reached in 2009.  In the twelve months ending February 2013, commissions dropped another 15% to $9.3 billion according to Greenwich’s survey.

Greenwich says that brokers are now in a reset period in which they are scaling back their business structures to align with a U.S. equity market of about $9 billion-$10 billion in annual institutional commissions, calling this the new normal. In taking steps to right size their business, Greenwich said that brokers are resorting to head count reductions, desk consolidation and cuts in compensation.

We are slightly more upbeat about the short-term prospects.  Anecdotal evidence from research firms we have spoken to suggests that the environment is somewhat more accommodating, although all agree that business remains tough overall.  The message from CSA brokers is mixed.  A few are reporting increases in CSA volumes from the first and second quarters, while many are saying that CSA volumes have been flat even though overall equity commissions are up.

Some analysts, such as Rich Repetto, Principal, Equity Research, Sandler O’Neill & Partners, are more upbeat on commissions.  He notes that retail trading as a gauge of investor sentiment is up 10 percent for Q2 at Schwab, E*Trade and TD Ameritrade. He believes the second quarter could be the best quarter since 2009.

One reason for Greenwich’s bearish outlook is that the average U.S. stock price has risen from around $30 per share to around $60 a share. This increase in average stock price has been a drag on trading activity as U.S. equity portfolios have received net inflows.

Asset owners have been scaling back their equity allocations.  Among all U.S. pension funds, endowments and foundations, average allocations to domestic equities have declined from 45 percent of total assets in 2001 to just 27 percent in 2012. Nearly one-quarter of the institutional funds participating in the most recent Greenwich Associates U.S. Investment Management Study say they plan to further reduce domestic equity allocations in the next three years.

You would think that the rotation out of bonds would benefit US equities.  Survey respondents said that they would be shifting assets to international assets, private equity and other alternative asset classes, however.  We think this may be overly pessimistic since performance in non-US equity markets has been lagging the US equity market.

A bigger worry for us is the shift toward passive management and ETFs. ETFs are at $13 trillion in assets and growing 22 percent a year.

For independent research providers, less may ultimately mean more.  Cutbacks in the equity research departments of investment banks reduce the glut in supply, which remains severe.  Longer term, independents have cost advantages, provided they can survive that long.

To help research market participants chart a course in these challenging times, Integrity Research Associates has produced a new report reviewing the investment research marketplace during a period of critical change.

Integrity’s Investment Research Special Report analyzes the key factors for growth for investment research and the industry outlook for 2013 through 2017. The report covers the global research industry, and has forecasts by region.  Each report is customized to include market sizing specific to the type of research conducted by the research firm purchasing the report, and includes an hour of access to the authors of the study.  For more information, go to


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