Yesterday, Greenwich Associates put out the results of a study they conducted from November 2008 through February 2009 stating that independent research providers have lost a significant amount of revenue from the buy-side. The study is interesting and while we at Integrity Research agree with some of the findings it uncovers, a number of problems still exist in the survey similar to those we discussed last year.
Greenwich Associates’ survey indicates that independent research providers received only 11% of the total research commissions spent in 2008-9, a number which was down from 18% a year ago. Greenwich estimates that $845 million was paid to independent research providers out of nearly $7.7 billion paid to brokers for research during the period. Greenwich further estimates that $13.7 billion were paid out in total commission fees in 2008-9.
The Wall Street Journal also chimed in on this news quoting Jay Bennett of Greenwich Associates as suggesting that independent research likely suffered because of its focus on niche and smaller cap stocks. Bennett also stated that the current economic conditions likely caused portfolio managers to focus on more macroeconomic data. The article further mentions the nearing of the end of the global research settlement as a possible reason that independent research providers may see additional decline in revenue in the coming months.
One other point mentioned in each of these reports is the fact that a number of star analysts have recently left bulge bracket firms. The article suggests that the departure of these analysts could lead to an increase in revenues for independent research firms as their clients follow them to the companies they have set up.
Integrity Research estimated spending on alternative research in 2008 at $2.1 billion; more than double the Greenwich Associates’ estimate. There are likely a few reasons for this discrepancy. First, there is almost certainly a definitional gap between what Greenwich Associates considers independent research and what we at Integrity Research define as alternative research. It appears that Greenwich is only considering independent firms which conduct fundamental research in its estimates.
In his comments, Jay Bennett mentions an increased focus on macroeconomic data as a reason for the decline in the estimated spending on independent research. At Integrity we include macroeconomic research and investment strategy research in our estimates, provided it is produced by firms not affiliated with investment banks.
We also consider primary research, such as channel checkers, survey providers and expert networks, as forms of alternative research. Primary research is one of the larger and faster growing segments of alternative research. In our upcoming Expert Network ResearchFocus report for example we conservatively estimate the Expert Network business by itself to bring in over $300 million in revenues.
Greenwich’s estimate of independent research seems to be solely focused on fundamental research, excluding economic, primary, specialized, quantitative and technical (our other five major categories of alternative research). Excluding these categories, our estimates are not far apart from Greenwich’s. The time period of Greenwich’s estimates differ also, since we are estimating over a calendar year.
The Greenwich surveys appear to use soft dollar spending as a basis for their estimates of independent research spending. It is unclear to what extent CSA/CCA spending is fully incorporated in their estimates, but cash payments clearly are not. A significant portion of alternative research is paid with ‘hard dollars’, explaining another difference between Greenwich’s estimate and ours.
We believe Greenwich’s survey may underestimate the amount of revenue going to independent providers because their survey tends to capture information on only the top five or ten firms a portfolio manager uses. This approach may turn up a few of the larger independent firms such as Bernstein or GLG however it won’t capture the amount of revenue spent on the “long tail” of independent research. Further, it will only capture those firms which have the best branding and may not accurately reflect the actual payments being sent out to firms in general.
Finally, we have noticed that once buy-side firms uncover a provider which they feel gives them an edge in the marketplace they are extremely reluctant to alert their competitors to the presence of the information.
But even with this difference in opinion over just how much revenue is out there for independent providers, the one thing that we can agree on is that there will be a significant decline in spending on alternative research over the course of 2009. So, we can agree with Greenwich that “independent research is still a very tough business.”