New York, NY – Despite declining sales over the past few years, Integrity Research projects that the global market for independent research will rebound modestly in 2012 as the buy-side resumes their search for unique (and legal) sources of alpha. However, Integrity’s forecast does not suggest that all alternative research providers will fare equally well as some segments will continue to face headwinds during the year.
Estimates on a Geographic Basis
According to our estimates, the global independent research industry is expected to rise 2.4% to $2.15 bln in 2012 after seeing revenue fall in the last few years. The modest increase we project in alternative research revenues reflects a slight gain in equity commissions. However, we don’t see these gains spread evenly on a geographic basis.
In fact, we estimate that the alternative research industry in the Americas will rise less than 1.0% in 2012 as the industry continues to struggle with tight commission budgets and continued concerns about the safety of using unregulated research sources.
Independent research firms headquartered in Europe and Asia are expected to rise a more robust 5.0% as buy-side portfolio managers look outside the US for attractive investment opportunities. It is also important to note that the alternative research industry in Europe and Asia has not been impacted as severely by the US insider trading investigation.
Estimates by Research Category
We do not expect that all types of research providers will do equally well in 2012. In fact, we project that in 2012 the healthiest segment of the research industry will be macro-economic and policy research providers which are projected to grow 3.7% as the 2012 US election cycle is expected increase investors’ appetite for these insights.
We estimate firms that produce fundamental research will post a modest 2.1% gain in 2012. However, the entire increase is expected to come from fundamental research providers in Europe and Asia.
Specialized research providers, including firms that produce forensic accounting and short ideas, ESG analysis, patent research, and analysis of management quality are expected to experience a meager 0.9% increase in 2012 as the buy-side tries to find innovative sources of investment ideas.
Two of the smallest research segments – technical analysis and quantitative research – are projected to post modest gains in 2012 of 2.9% and 1.8%, respectively. While investors typically don’t spend much on these types of research, the fact that they are devoid of potential insider information should help these segments grow.
Primary research firms, including expert networks and channel check providers, are projected to record a meager increase of 0.4% in 2012 as buy-side investors continue to remain wary of introducing risky information into their investment process.
Risks to Integrity’s Forecast
Despite our estimate of a modest gain in the alternative research industry in 2012, we believe there are a number of downside risks which could prompt a significantly weaker performance than expected. These include:
- Equity commissions have fallen the last few years. One risk to our forecast is that commissions could continue to fall in 2012. This would severely impact indies if the increased market share that the sell-side experienced in 2011, continues this year. This would result in a smaller pool of commissions that buy-side investors would have to spend on alternative research providers.
- Hedge funds underperformed in 2011 when compared to other investment vehicles. Another risk to our forecast is that poor hedge fund performance, and increased government regulation of the industry could prompt a significant reduction in the number of active hedge funds in 2012 and beyond. This would reduce the number of active consumers of alternative research.
- One development that has clearly dampened demand for US alternative research in 2011 was the US insider trading investigation. A third risk to our forecast would be continued insider trading arrests might scare the buy-side from using of alternative research in the US.
- In the last few months, legislative focus on limiting insider trading among US congress has risen. One of the bills aimed at addressing this issue includes mandatory registration of “political intelligence” firms. Another risk to our forecast is that increased attention on this issue, or outright legislative action, could hamper investor interest in the use of policy research or insight from firms providing “political intelligence”.
As we mentioned above, Integrity Research Associates projects that the global independent research industry will increase a modest 2.4% to $2.15 bln in 2012, reversing a downtrend seen over the past few years. However, we also see a number of downside risks to our forecast which could lead to another year of reduced spending on alternative research. We will keep an eye on the buy-side’s demand for independent research over the next few months and see which scenario plays out.