The Changing Value of Investment Research


New York, NY – Numerous studies in recent years have shown that the value of traditional research reports has been on the wane, while other factors, including direct analyst service and management access are becoming the core source of value for the buy-side.  However, the continued production of research reports by most sell-side and alternative research providers suggests that many have not understood this dramatic shift in perceived value.

Break-down of the Buy-Side Research Spend

According to a study published by Greenwich Associates in June 2007, institutional investors continue to rely on direct contact with analysts, management access, and invitations to various research conferences.  At the same time, buy-side investors saw less value in sales coverage, company or industry research reports, and specific stock recommendations.

Proportion of Research Commission Allocation




Analyst service




Access to company management




Sales coverage




Research conferences




Company or industry reports




Thematic investment ideas or specific stock recommendations




Economic analysis and portfolio strategy




Global research




Customized research








The Value is in the People

The Greenwich Associates survey indicates that the amount buy-side investors are paying for analyst service has risen from 23% of total commissions in 2005 to 24% in 2006 and 2007.

As we have said for some time, the information overload that has taken place in the past decade has created an environment where buy-side analysts, portfolio managers, and hedge fund managers can no longer keep up with the most important company and industry developments, nor can they make sure they are seeing all of the best investment ideas.  The tidal wave of sell-side and alternative research means many great ideas are going into buy-side e-mail trash bins.

Consequently, the buy-side is relying less and less on reading an analyst’s research, and more and more on speaking directly to analysts who have developed trust, credibility, and unique industry expertise.  This enables the PM, buy-side analyst, or hedge fund manager to brainstorm with analysts, deriving direct answers to their questions and generating unique investment ideas that may not be covered in a public research report.

Many bulge bracket firms have realized this and have started limiting access to their top analysts to their best institutional clients.  Thus, mid-sized and smaller buy-side investors have found it increasingly difficult to get access to high quality analysts.  This development has forced smaller buy-side firms that do not have sufficient commissions to get access to blue chip analysts to rely on analysts at regional or boutique brokerage firms, or alternative research providers.  We suspect that some smaller buy-side firms have even sought out access to industry experts from the growing number of “expert networks” that have sprung up in recent years.

Based on these trends, we would not be surprised if research providers, in an effort to maximize the return of their most valuable assets, eventually look to auction off access to their most influential analysts in the future.

Access to Management Remains Important, but…
The recent Greenwich Associates study revealed that the amount investors paid for access to company management slipped modestly to 19% in 2007 from 20% of all institutional commissions paid in 2006, and 18% in 2005.

The modest drop off in commissions allocated to facilitate management access in 2007 does represent a significant change from the steady uptrend seen in past years.  Of course, one year does not make a trend and we will have to wait to see if the buy-side spends a greater share of its research budget on management access in the coming years.

Despite the slight decline in management access, the buy-side paid 13% of all commissions for invitations to research conferences in 2007 from 11% in 2006.  Many buy-side analysts, portfolio managers, and hedge fund managers found that conferences were another efficient way to meet with the management teams of numerous companies they might be interested in.
As we have argued in recent years, the buy-side’s reliance on sell-side firms for access to company management seems to us to be rather suspect part of the value proposition of their research offering.  Not only is it unclear how one can argue that management access is actually research, but it is also surprising that large buy-side firms continue to pay for a “concierge service”.  Large buy-side firms should be able to get access to most company management teams they want to meet, thereby eliminating the need to pay so much to the sell-side to arrange these meetings.
However, we suspect that industry conferences will remain an important part of the value proposition for sell-side and alternative research providers as these events provide tremendous opportunities for buy-side investors to speak directly with analysts, company executives, and industry experts.  In addition, these venues also provide investors with the opportunity to network and share ideas with their peers – a source we think is extremely important to many buy-side analysts, portfolio managers, and hedge fund managers.

Sales Coverage is Key

Institutional investors spent considerably more on sales coverage this year over the amount spent during the prior year, rising from 11% of all research commissions spent in 2006 to 14% in 2007.  The primary value that buy-side investors get from the research sales person is as follows:

1) As a Filter.  Good research salespeople get to know what matters to clients and directs them to the research that matters to them.

2) As a Monitor.  Good research salespeople keep clients abreast of all the news and developments that could impact the stocks or sectors they follow.

3) As an Idea Generator.  Good research salespeople leverage their research departments to develop their own relevant, high confidence trading ideas and communicate these ideas to their clients.

Most sell-side firms understand the connection between a strong sales organization and a valuable research product.  However, the value of the research provided by many alternative firms is hindered by the lack of a strong institutional sales infrastructure.  This is one reason that institutional investors continue to pay more for sell-side research, even though they are buying more and more alternative research.

Written Research Declines in Value

In the past few years, the buy-side has allocated less and less of their research commissions to a firm’s written research product, including company and industry reports, thematic research, or specific stock recommendations.  According to the recent Greenwich Associates survey, institutional investors paid 18% of their commissions for this type of research in 2007, falling from 22% in 2006 and 23% in 2005.
This data is consistent with our view that research reports have become less important to clients than other ways of tapping an analyst’s expertise – namely through direct access or interaction at conferences.  Consequently, we believe that research reports have merely become advertisements for an analyst’s insight and expertise.  The real value lies in facilitating conversations between smart clients and insightful analysts.
The Greenwich Associates study also supported findings we presented last week, where buy-side investors place little stock in the performance of a research providers BUY / SELL / HOLD recommendations.  In fact, we have seen one study correlating the commission payments made to various brokers and independent research providers by a large global asset manager and the performance of these research providers’ research.  This study actually revealed a negative correlation between commissions received and the performance of their stock picks.

Of course, this should not be construed to mean that stock recommendations don’t matter at all – as they do offer one measure of the competency and credibility of an analyst.  However, buy-side investors tend to value deep industry knowledge, experience, and unique insight over stock picking ability, as they believe they are being paid for their ability to pick the right stocks.

And the Point is…

In summary, the team at Integrity Research Associates sees that the point of this survey is that research providers need to align their products and services more closely with what institutional clients are willing to pay for.

This means research firms need to focus less of their attention and resources on their written research and more on hiring and keeping knowledgeable, experienced analysts, and providing clients with access to these experts.  In addition, research providers need to offer other services, like management access and research conferences to fulfill their need for primary insight into company and industry developments.

The firms that do this will be well rewarded, while the firms that continue to try and convince clients to value what they produce will always find it difficult in getting paid what they think they are worth.


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