New York, NY – One of the segments of the alternative research industry which has shown the most resilience in 2008 and thus far in 2009 has been the investment strategy business as institutional investors have been trying to identify the major themes likely to move the markets in this period of extreme uncertainty. At the same time, many investment banks have reduced their commitment to the strategy role in response to the severe financial strains that they have experienced. Consequently, in the past few months, a slew of former sell-side strategists have decided to try their luck as independent or boutique research providers.
Size of Strategy Research Industry
According to Integrity’s proprietary database, we categorize approximately 35 research firms as providers of investment strategy research. Investment Strategy firms are those research firms that provide portfolio level recommendations, as opposed to security level recommendations. These research providers make portfolio or sector allocation recommendations, provide “big picture” thematic research, or analyze the major drivers of securities markets.
Based on our analysis, third-party investment strategy providers generate approximately $300 million in annual revenues. What is interesting is that the investment strategy business reveals a “long tail” phenomenon – much like what we see in the alternative research industry in general. Consequently, the investment strategy business is comprised of a small number of relatively large firms, followed by a large number of small boutique providers. In fact, based on our data, the top 20% of the firms we have categorized as investment strategy research firms generate approximately 85% of the industry’s revenue.
Widespread Demand for Strategy Research
In the second quarter of 2008, Integrity conducted a survey of 181 money managers to gain insights into how the buy side views the investment strategy space as well as the providers within it. Our survey included respondents from the United States, Europe, and Asia and reveals how investment strategists are used by hedge funds and mutual funds within these regions. Respondents who use investment strategy research were evenly divided between hedge funds and long only managers. The survey also examined differences in usage between larger investment firms and smaller firms.
Forty-four percent of the respondents to Integrity’s buy-side survey use independent investment strategy research. The broad usage of investment strategy reflects its appeal to a variety of different investment styles and approaches. Because investment strategy focuses on portfolio level advice, many investors view investment strategy as a complement to their investment specialties. It is not uncommon for investors to use investment strategy advice at the sector level, supplementing it with their own security level analysis.
Growth in the Number of Providers
Since 1980, the number of investment strategy providers has been increasing steadily. It is interesting to note that the fastest growth seen in the Investment Strategy segment has taken place since 2000, when the number of firms has increased by 75%, from 20 to 35. Note that there is a survivorship bias to this analysis, since we do not include strategy firms which may have gone out of business since their inception.
When we conducted this analysis and published our comprehensive Investment Strategy ResearchFocus report last November, we expected that the growth seen in the past few years would continue into the future as more sell-side analysts decide to branch out and start their own firms, or as existing firms decide to offer investment strategy research. What we didn’t know was just how prescient our analysis would be.
Of course, we knew at the time that a few new firms had started up in 2007, including ResearchEdge and Strategas Research Partners. Keith McCullough of ResearchEdge worked as an analyst and portfolio manager for a number of buy-side firms, while Jason Trennert, one of the founders of Strategas, previously worked as an investment strategist for ISI.
New (and Not so New) Strategy Firms Spring Up
What we did not know at the time was the number of new (and not so new) investment strategy firms that were likely to spring up in late 2008 and now in 2009.
One new investment strategy firm that has arisen from the ashes of the recent meltdown in the securities market is New York based Golub Market Insights, founded by Bear Stearns’ former Chief Strategist, Jonathan Golub. At his new namesake firm, Golub has continued producing the mix of unique quantitative and qualitative analysis that was the hallmark of his research at Bear Stearns. Golub Market Insights has been distributing research and holding regular conference calls for clients on a trial basis for the past few months.
Another boutique strategy and investment advisory firm that has opened its doors recently has been Chicago-based Coxe Advisors, founded by one of the most highly respected sell-side strategists – Donald Coxe. Until late last year, Coxe was the Global Portfolio Strategist for BMO Capital Markets. While at BMO Coxe published a monthly institutional portfolio strategy journal, Basic Points, and conducted a widely-followed weekly institutional strategy conference call. Coxe recently reached an exclusive distribution arrangement with former employers BMO Nesbitt Burns and BMO Capital Markets for his Basic Points strategy journal and his institutional conference calls. Distribution of these services started in the past few weeks.
Last week, Merrill’s chief investment strategist Richard Bernstein, and chief North American economist, David Rosenberg announced they will be leaving the firm in the next few months. While Rosenberg has announced his plans to become chief economist and strategist at Toronto-based wealth manager Gluskin Sheff + Associates, Bernstein’s plans are less clear. An internal memo sent to the Merrill and Bank of America staff said that Mr. Bernstein might pursue opportunities on the buy-side, in teaching, or he may even write a book. Of course, Bernstein might also be attracted to hang out his own shingle and start a boutique strategy firm.
More to Come?
As we have mentioned here numerous times in recent months, institutional investors are struggling to deal with poor performance, extensive redemptions, and declining assets under management. In addition, equity commissions are expected to fall between 30% to 40% in 2009 – a development that will force the buy-side to sharply reduce the amount they pay for proprietary and alternative research.
The big question is, “Will the reduction in research commissions that will be paid to the sell-side in 2009 cause them to further reduce the type of research they provide to the buy-side?” If so, then we can expect other sell-side strategists will need to look for new ways to ply their trades – either on the buy-side or by starting their own investment strategy firms.
For a detailed insight and analysis on the alternative investment strategy industry, consider purchasing Integrity Research Associates’ comprehensive ResearchFocus report on this topic. For more information about this report, or how you can subscribe to the entire ResearchFocus series, contact:
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