The following is a guest article by Edward Blad, Founder and Managing Director of the Independent Research Forum, a London-based sales and marketing channel for independent research.
Mifid has been casting a light over us for a year now, and although the intentions were clearly worthy, unintended consequences have made life very difficult for much of the investment research industry. However, if we look at the Independent Research Forum, we are in good shape — not much has changed and we are actually seeing an increasing demand for our services.
Whilst we observe that many long-only funds have battened down their hatches as a result of Mifid, the more agile hedge fund community continue to hunt for alpha generators with high-quality, differentiated and exclusive insight. We are fortunate to work with many such providers.
Fund managers’ specific research requirements can vary widely. Some seek providers who generate ideas; others generate all ideas in-house so focus their searches on broader industry sector and segmental expertise. What is clear is that institutional investors are using less and less research from the traditional sell-side. Some say they don’t use any at all and will only consider research from independent sources.
Certain skill sets and coverage areas are increasingly in demand including forensic accounting / shorting specialists, corporate governance assessment, primary research channel-checkers, policy insights, thematic research, unique data-sets, and corporate credit and distressed coverage. Certain sectors have been highly sought after given recent trends, for example in Video Gaming, China Internet, Semiconductors, Energy and Infrastructure. Independent voices need to be heard on broad topics such as Brexit, trade wars and the actual state of the Chinese economy.
From predicting the oil price to reach USD 85 and then its subsequent fall; highlighting Steinhoff as a fraudulent business one year before it capitulated; finding holes in Kier’s accounting; shorting Canadian cannabis stocks; and waiting seven years for Ocado to finally deliver the goods through its slick technology platform, IRF Providers have continuously helped funds to produce impressive returns.
Leaders amongst IRF analysts have emerged: a former Principal at Bridgewater focusing on Emerging Markets macro; a former Head of Research at ABN Amro specialising in European equity short recommendations; a past Head of Developed Markets Strategy at Morgan Stanley still producing his widely read weekly publication now under his own umbrella; a former credit portfolio manager researching Europe-wide corporate distressed assets; a former hedge fund manager researching energy and hard commodities from a macro and equity stand point; and a former Intel employee now expert at detailed channel checks in the technology space whilst based in Silicon Valley.
In terms of research pricing, premier services have been able to maintain their high-level fees. Single analysts can make USD 50k per annum per client if they are top tier. ‘Me-too’ providers, typically traditional sell-side houses, have either priced their research at increasingly modest levels in order to compete, or have experienced a gradual decline in revenues. As a result, we are seeing big cuts to the sell-side in terms of research analysts and much reduced coverage.
Unlike research distribution platforms which hoped to capitalize on Mifid, IRF is focused on relationships. We have adapted our model within the independent sector through some 20 years to achieve a perfect match with the existing market dynamics. Establishing long-term relationships with selected providers and institutional investors is the key to progress and positioning overall. With nearly 170 providers, IRF is able to make successful introductions whatever the asset class, geography, sector, and methodology a fund seeks. We believe research needs to be bought from people by people; it’s not sold through technology platforms.
In our view, the usage of independent research by the investment community will continue its upward trajectory as Mifid’s requirements are absorbed by market participants, and that by working with providers who demonstrate skill and agility, IRF can be successful in its primary objective to support market efficiency.