Following the lead of investment banks, money managers are turning to India to hire research analysts at a cheaper price.
Analysts in India are handling research duties such as data collection, company research, valuation analysis, the construction of financial models and even the development of insights on individual companies.
Because the individual research analysts are cheaper to hire in India, outsourcing often translates to having bigger research teams that can delve deeper into research.
They can get a lot more granular in their analysis, said Niket Patankar, chief executive officer at Adventity Inc., New York, a business that matches U.S. financial services firms with analysts in India. With investment managers, (outsourcing) is more about getting more people to help develop more ideas that are winners.
Just a year ago, Mr. Patankar provided outsourced research to 10 hedge funds, mutual funds and asset management firms. That number has now jumped above 30.
Dushyant Shahrawat, a research director for the Tower Group, Needham Mass., is drafting a report about financial service firms outsourcing research to India. His preliminary estimates indicate that 20% of U.S. institutional money managers have part of their research conducted in the overall offshore market.
By 2010, I would expect 70% of institutional money managers to have something in the offshore market, Mr. Shahrawat said.
According to Mr. Shahrawats preliminary estimates, investment management firms have spent $165 million on outsourcing investment research, a jump of $40 million in the past two years. The bulk of that money is going to India, he said.
Those figures pale in comparison to the amount of research investment banks have outsourced $385 million, Mr. Shahrawat estimated.
Banks moved their research to India after the U.S. Securities and Exchange Commission cracked down on the way banks generate revenue from sell-side research. Once analysts could no longer receive compensation from investment banking fees, costs had to be cut on the research side, and outsourcing made sense, Mr. Shahrawat said.
All about cost
Cost is an undeniable factor in why managers are moving more research to India. Mr. Shahrawat estimates the cost of an analyst with less than three years experience in the U.S. is $140,000, compared with $40,000 in India. Managers can afford more analysts and can do research around the clock.
We can have a lot more analysts because of the cost benefit. That means we can leverage up our senior analysts more, said Stephan Michel, the head of research at Cairn Financial Products Ltd., London.
Cairn has $22 billion under management, including a hedge fund and portfolios of asset-backed securities, investment-grade and high-yield bonds and leveraged loans.
Mr. Michel said the firms team of seven analysts in India contributes to reports on companies by writing the business and industry descriptions and management recaps. The group also writes daily news summaries on all of the companies in which Cairn invests. This function used to be handled in London and would not be completed until lunch time. Now, it is done overnight and finished when the senior analysts arrive at work in London.
One of the advantages with this that we thought would be a disadvantage is the time difference, Mr. Michel said.
The analysts working for Cairn Capital in India also conduct forecasting models of a company, but senior analysts in London lead those efforts by telling the analysts in India what assumptions they should use in a model.
The work done in India has given Cairns senior analysts in London more time to meet with management and competitors of the companies in which they invest or to which they lend money, Mr. Michel said.
While some sources say outsourcing is on the rise, it is still not the norm, consultants said.
Stephen Nesbitt, CEO of alternatives consulting firm Cliffwater LLC, Marina Del Rey, Calif., said the number of money managers outsourcing is spotty, but it happens frequently enough that consultants ask managers what parts, if any, of their research is outsourced.
Mr. Nesbitt said if data collection and very basic research is outsourced, it does not raise a red flag, but he prefers to see higher-value research done in-house.
Outsourcing is a sensitive issue at most asset management firms. Executives at most firms will not talk about it, but the number of firms looking overseas will continue to increase, Mr. Shahrawat said. Its politically difficult, but the economics are pretty compelling.
Still, the amount of research outsourced will remain limited, Mr. Shahrawat added. A large part of the research process involves meeting with management. You cant fly from Mumbai in six hours.