Key Takeaways From the Unbundling Uncovered Conference

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The following is a guest article by Mike Carrodus, founder of Substantive Research, a research curation and benchmarking service, summarizing topics discussed at the firm’s recent conference focused on current research industry trends. To view the complete unedited version of the takeaways, click here. 

Earlier this month we had the immense privilege of bringing the investment research market together once again at our annual Unbundling Uncovered conference – but this time physically as well as virtually, with 300 professionals joining us in London, and 200 joining us virtually from the US and Continental Europe. We want to thank our wonderful speakers for giving their time and insight, and the following are key takeaways that came out of their comments:

ESG regulation has superseded unbundling as the next stage of transformation of the research and data industries. 

Now that fixed income research can be bundled once again in 2022 in the UK, there is hope that the EU would follow suit at the end of 2022 for asset managers’ 2023 budgets. In the US the unbundling debate has gone quiet, and the no-action letter allowing European asset managers to pay hard dollar to US brokers should be extended beyond 2023. Both European and American speakers agree the pressure now is on the commercial side when it comes to costs and budgets – it’s all about fees!

Regulators are now focused on ESG ratings and data, as fund managers struggle with backward looking data, a plethora of frameworks and competing guidelines, and an unclear roadmap ahead. 

Fund managers will be shopping for research again in 2022, but asset owners may dictate what is bought, making ESG a priority. 

Initially the pandemic made investment teams rely on their core relationships – interactions spiked with the bulge bracket providers. But then the acceleration of ESG asset gathering has ensured that this is the game changer in this industry. There was a clear feeling that increasingly the asset owners will drive much of the new investment in research and data, increasing demand for ESG.  The three drivers of this buy side focus on ESG data and research are regulation, alpha generation and client demands, and the last driver is the one that matters most.  

ESG research and data pricing is in its early days – currently you take the list price and see if a multi-year commitment helps. Some asserted that the ESG data budget is not shrinking the traditional research budget, but others underlined that if you want to grow inside the research budget the ESG offering needs to be credible. In Europe it’s predominantly a hard dollar approach, so everything is competing for budget with the same cost pressures. 

There will be an increasing need to make sense of all the ESG data, and so there are analytics firms providing data and scores, and some providers concentrating on a thematic, forward-looking approach to interpretation. Others are partnering with data providers to provide a layer of fundamental research to the process that is specific to companies and sectors.  

The longer ESG and fundamental research exist in separate silos, the bigger the risks can be in overstating ESG credentials. Research, data valuation and budgeting processes need to evolve to address these risks effectively, and if you are in retail fund markets then that matters now. 

ESG data budgets are going up 20% a year and accelerating to $1bn this year, and that is probably an underestimate. Ratings and data have driven spend in ESG so far, but a new stage is coming. Investment consulting firms are starting to come in and ask for explanations of why assets are being graded one way or another, so an overlay is required to these naked scores. ESG assessments should not be separate and should not be divorced from the fundamental assessment of companies. And growth in ESG spend will need to be significant in absolute terms – growing your ESG budget 100% from $30k to $60k is not going to cover it!

The way asset managers reward research continues to evolve, and the research budget has changed in market share and focus as a result.

As in previous years – it was underlined that the buy side doesn’t give the sell side much transparency when it comes to what they find most useful. One speaker said that the transparency discussion was a qualified failure between the two sides. Some on the buy side countered that fund managers should not spend time analysing analysts (!) and that the sell side should be able to join the dots, whilst others highlighted how much they do already to share on where they’ve found value from providers. 

In the pandemic increased interactions were often not accompanied by increased payments – the debate on whether a virtual engagement is worth less than a physical one still exists, with some buy side paying the same and some paying less for virtual. However, all had a qualitative element to payments that meant value should be recognised overall.

The vote process is evolving and voting for specific analysts is a growing factor which could help the transparency debate. But the buy side will want comfort that if they did provide detail that it wouldn’t create another mountain of questions and objections.

Another example of the evolving budget is the fact that expert networks (ENs) have taken a significant and growing position within long-only research budgets. The factors to look for in expert networks should be quality of expert, speed of delivery, cost and also administrative hassle. Speed was underlined as a key driver. Transcript libraries have also gained traction for the same reason.

The supply of research is changing in every way possible.

Juniorization in the research market is a real thing, with 7,500 years of experience lost since 2018 and headcount numbers often dramatically reduced. If this is here to stay, then technology and data needs to empower the existing analyst teams with better tools to continue to add significant value. The technology for asset managers to extract what they need from these varied inputs efficiently is now at a more mature stage of development.

On the access side of things, as we emerge from lockdowns non-deal roadshows and IPOs will stay virtual. Conferences will come back, with a higher bar for “must-attend” status with corporates especially making tough decisions about travel when they spend their carbon budgets. 

Finally, research providers are moving fast to integrate video and written content. The pandemic has created a higher propensity for PMs to search across all formats for the information – when it works well it will drive value and ensure providers are rewarded.

None of this means the salesperson becomes less important, in fact all speakers asserted that they are crucial in this next dynamic stage, to be able to explain, curate and highlight across platforms, topics and assets. Within these themes of ESG, managing analyst costs in a tough market, the proliferation of research delivery formats, the evolution of client strategies etc. the one enduring factor seems to be that this market still needs great salespeople, who need to be identified and rewarded by both the client base and their own firms! 

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About Author

Mike Carrodus founded Substantive Research, a research curation, comparison and valuation service in early 2015 with two goals in mind: to match research providers and PMs using a bespoke, data-driven process, and to help asset management firms ensure that they were consuming the highest quality research at the cheapest price. Substantive has a bi-weekly readership of over 1,000 buy-side professionals who use their newsletter as a key identifier of the best thematic work. Prior to starting Substantive Research in April 2015, he was Global Head of Institutional Sales at Ned Davis Research, one of the leading independent investment strategy research providers.

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