GREENWICH, Conn. Buy-side equity analysts say they are looking to use more research produced by independent, or boutique, shops, but theres no evidence theyre putting their money where their mouths are, according to a new study by Greenwich Associates.
The study, based on interviews with 1,099 analysts working for U.S. investment managers, pension endowment funds, mutual funds, banks and hedge funds, showed a split between what institutions say and what they appear to be doing, said John Colon, one of the Greenwich consultants who authored the August study.
The reported showed 39% of buy-side analysts predicting they would increase their use of products and services from boutique research providers during the coming 12 months, and only 4% anticipating a decrease.
By contrast, only 9% predict an increase in their demand for research from full-service brokers, while 18% anticipate a decrease.
If the numbers suggest brighter days ahead for independent research houses, the latest data on where institutional investors are directing their commission dollars tell a different story. In an interview, Mr. Colon said that responses by 218 buy-side portfolio managers showed institutions cutting the amount of commission dollars they spent on independent research to roughly $750 million for the 12 months ended January 2007, from $775 million for the 12 months ended January 2006.
While the notion of independence is clearly an attractive one, those numbers suggest that independent research houses, on balance, are having difficulty penetrating the institutional marketplace broadly, Mr. Colon said in the interview.
One possible explanation for that discrepancy can be found in the answers buy-side analysts and portfolio managers give about what theyre looking for from their relationships with research providers.
Direct access demand
While interest in traditional research staples such as reports on individual companies or investment themes continues to decline, demand for direct access to analysts and company management teams is growing. Full-service brokers are often able to arrange meetings between clients and company managements at investment conferences they host, Mr. Colon noted.
Greenwichs report shows 25% of commissions being allocated in return for access to analysts and 22% for direct access to companies management. For hedge fund analysts, access to management claimed the highest proportion of their research commissions, at 27%. Mr. Colon said in the era of fair disclosure regulations, that access is less focused on the possibility that a manager will slip up and give away inside information and more focused on getting the measure of how effective managers are.
The Greenwich study comes out at a time when commission rates on U.S. equity trading are continuing to fall, while a growing share of institutional equity trades are being executed through low-cost electronic systems.
Looking to the future, one wild card will be whether the sharp growth in commission-sharing arrangements, or CSAs, will boost the flow of commission dollars to independent research producers, Mr. Colon said. Facilitated by recent Securities and Exchange Commission clarifications on using client commissions to buy research, CSAs allow an institutional client to execute its trades with a particular broker that can provide best execution, while building up an effective pool of credits after compensating that broker for its trading and research that the client can use to compensate other broker dealers and research providers.
At the time Greenwich conducted its interviews for the study, roughly one-third of institutional clients had CSAs in place, with another third predicting they would establish such arrangements during the coming 12 months.