This is a guest summary post by Alphametry CEO Fabrice Bouland, of a recent senior executive roundtable about the future of equity research. You can download the full whitepaper version here.
An industry in trouble?
- Global investment banks have seen shrinking revenues and in turn have been allocating increasingly smaller budgets to equity research. Several external factors affect revenues, among them:
- Lower trading volumes caused by post-financial crisis industry deleveraging;
- Fierce competition from electronic trading automation;
- The rise of passive investing with exchange-traded funds (ETF) products rather than direct equity ownership;
- At the same time, supply issues such as mid and small-cap stocks poorly covered are adding a layer of complexity to the agenda.
- The market as a whole is also very opaque in terms of pricing and service levels.
- The delivery of content is about to radically change. The bulge bracket investment banks are starting to move towards digitization.
SAVING EQUITY RESEARCH
- Regulators are pushing for research spending transparency on several key areas, including:
- Price disclosure;
- Approved budget and reporting;
- Forecasts of how much research to spend; and
- Assessment of investment value versus spending.
- Since its introduction in 2007, the use of commission sharing agreements or CSAs has gradually expanded as a tool of choice for asset managers to access independent research.
- On the regulator’s side, it is UK’s Financial Conduct Authority (FCA) that is taking the lead on the unbundling efforts while others, like the French Authorities AMF continue its support of CSAs, only advocating to add more transparency measures.
” There is strong evidence to suggest the current model of using dealing commission to pay for research reduces transparency and creates a link between research spend and trading volume, without a clear assessment of the value this offers to investors” – Martin Wheatley, Former CEO of the FCA, who stepped down July 2015
- To replace CSAs, the FCA wants to implement the new Research Payment Account (RPA) scheme and will ban inducements.
THE PRICE OF EQUITY RESEARCH
- Separating research from execution raises a simple question that will be exceedingly hard to answer: how much is research worth? In a survey from a Bloomberg Institutional Equities Event, respondents were asked what factors were the biggest challenges when valuing equity research:
- 37% said transparency was the biggest challenge;
- 25% said ‘a la carte’ pricing;
- 21% pointed to pricing benchmarks;
- 10% said disparate evaluation; and
- 7% said regulatory clarity.
- Pricing equity research was a hot topic in the Alphametry roundtable. Participants noted that as there have never been internal benchmarks for evaluating equity research and that the range of pricing will probably be very wide.
- Are current investment research prices fair? Sentiments from the sell-side in the roundtable leaned towards a “name your price” approach. Some participants were interested in exploring commission-based models with various level of service.
- Similar sectors like digital news media are changing their entire business models because content that was once paid is now free.
- Another factor that plays into pricing is content longevity or shelf life. Roundtable participants pointed out that some content such as sector reports could be relevant for months.
INVESTMENT RESEARCH 3.0: AN INDUSTRY REBORN
- Regulation is converging and investment firms are building global compliance platforms applying best local practices.
- Research is going through its digital transition phase. As more content becomes digital, the industry is focusing less on the velocity of data and more on how large datasets can be analyzed.
- Data volume is rising exponentially. Social data, web site usage, physical surveillance (e.g. shopping center parking spaces), and connected object will all be taken into account.
- The industry is facing its largest organizational restructuring challenge ever in building up staff experience on the technology stack and using analytics to understand clients better.
- Distribution platforms are playing larger roles and platforms that can deliver fully digital content with integration and interactivity have the upper hand.
- All information-intensive industries such the media will be re-intermediated.
BNP Paribas, Citigroup Global Markets Asia, CIMB Securities, CLSA, Deutsche Bank EFA, Global Equity Flow, IBT, Morningstar Asia, Nomura International, Société Générale, Shenwan Hongyuan Research, UBS
To gain deeper insights of equity research digital trends and emerging economic models, download here your free copy of Alphametry roundtable whitepaper.