Money managers are beefing up their research staffs — albeit slowly — amid increasing pressure to uncover fresh investment ideas that will help them outperform markets with low return expectations.
Money managers' research staffs increased 4% to more than 10,000 people last year, while their portfolio management staffs shrank slightly, according to Pensions & Investments' annual money manager directory.
In addition, Greenwich Associates, Greenwich, Conn., found that between early 2003 and early 2005, the average research staff at U.S. buy-side institutions increased to 10.5 people from 9.3.
Keith S. Macomber, a partner at executive search firm Christian & Timbers, New York, said investment firms are hiring more people for quantitative research, fundamental equity research and fixed-income research.
"In late 2003 and early 2004, particularly with blowups like the WorldComs and the Enrons, there was strong interest in credit people and maybe a little cutting back on equity," he explained. "But they're slowly building back up on the equity research side."
Mr. Macomber also noted that more firms are beefing up quantitative research, seeking to combine the best of quantitative and fundamental research.
"I met with a CIO of equities and he's tended to be more of a fundamental shop, but he's definitely beginning to build and marry fundamental analysis with quantitative methods," Mr. Macomber said. "He's seeing that as an important part of equity portfolio management. More firms are going that way."
ING Investment Management, Hartford, Conn., with $160 billion under management, is one of those firms.
"What we focused on in our buildout of analysts at ING is experienced investment analysts," explained Rick Nelson, chief investment officer. "The second thing is providing them with a quantitative toolkit to get them focused on the most fertile areas for ideas."
At Federated Investors Inc., Pittsburgh, with $178.9 billion in assets under management, quantitative research is the first of four components necessary to adding alpha, said Stephen F. Auth, CIO for global equity. "You need to have a certain amount of science in what you're doing with the portfolio," Mr. Auth noted.
"The second (component) is fundamental research," he said. "In our view, fundamental research is one of the core competencies that an investment manager should bring to the table in trying to add value for clients." Mr. Auth expects roughly two-thirds of any alpha generated in a portfolio to come from internal fundamental research.
The other components are disciplined portfolio construction and attention to trading and execution, he said.
During the past five years, Federated has put major emphasis on building internal research, Mr. Auth said. "Five years ago we would have had a smaller number of dedicated research analysts with less experience," he added. "We've got north of 40 people, and five years ago it probably would have been around a dozen, with average years of experience maybe five instead of 10 (now)."
At ING, Mr. Nelson has added a new chief of quantitative research as well as five analysts, bringing the firm's quantitative research group to nine. On the fundamental side, where analysts pore over earnings reports and talk with company management and competitors to get a handle on a company's financial health and direction, Mr. Nelson has hired six senior analysts and three others to its existing staff of four. He said the firm is currently looking to add another senior analyst and might hire one more. Senior analysts have an average 15 years of experience; regular analysts have about five.
In addition, the firm also has analysts who work for specific portfolios.
"In effect we created a large- and midcap research capacity that ING in the U.S. did not have previously," he said.
On the quantitative side, Mr. Nelson said demand for the "high-frequency techniques" that those analysts employ is being driven largely by hedge funds.
Smaller money managers have also been increasing their analyst corps.
Richard A. Ciccarone, managing director and chief research officer at McDonnell Investment Management LLC in Oak Brook, Ill., said his firm hired seven analysts when it added an alternative credit investments strategy, which is "very research-intensive." McDonnell runs about $8 billion in fixed income. Another seven analysts work in the investment-grade group.
Like many money management firms, McDonnell relies first on ideas generated by in-house research staff, but it also uses third-party or independent research sources along with traditional sell-side research from Wall Street's big brokers.