The world of third party investment research seems to grow bigger every year, with more providers, more alternatives, and more products becoming available. The incoming MiFID2 regulations in Europe will change the game for sell-side research, which in many cases will see it put on a more even playing field with the independent research providers. Many consumers of investment research are already overwhelmed by the volume of stuff on offer, versus the growth in the industry, so it’s worth considering some of the key factors and issues that fund managers should think of when buying independent or external research.
This list is by no means exhaustive, so I would very much appreciate your perspective in the comments below, especially if you disagree or feel I’ve missed something. My background is I’ve worked on the buy-side as an investment strategist at a multi-asset fund manager, and now run my own independent investment research provider. So I come to the issue with the perspective of both a consumer and a supplier… I’ll try to leave my biases at the door, but go ahead and call me out if I end up talking my book!
That all said, here’s the 10 things to think about when buying investment research:
- Relevancy (part 1): Does it cover the things you know you need to know? This is a fairly obvious one, but it is basically the most important issue. Does their research consistently cover issues and ideas that are important or relevant to your portfolio and approach? i.e. the asset classes/markets/regions that you invest in.
- Relevancy (part 2): Does it cover the things you didn’t know you needed to know? This one is less obvious, and may actually take some time to find out (i.e. you may need to trial their work and wait for perhaps some of their more obscure ideas to playout, or for the issues they’re covering to come front of mind for markets).
- Frequency: Some providers publish daily (even hourly), while others go monthly or fortnightly, or just whenever. Daily can be very useful, but it can also become overwhelming and raise the risk of non-use. It really depends on the user, i.e. your habits, your time budget, your frequency and pace of decision making, and the threshold for action (e.g. contrast a life insurance fund which may only make a handful of allocation changes in a given year, vs a GTAA hedge fund which may trade numerous times a month). The trade-off is information overload vs missing key stuff or getting it too late.
- Philosophical alignment: While you don’t necessarily want someone to just sit there and confirm your own views and ideas, it usually pays to have at least some philosophical alignment in approach. For instance, a provider which takes a multi-factor approach, with one factor being technical analysis might raise the risk non-use by someone who doesn’t believe in technical analysis. In essence, you need to be comfortable with their approach and research philosophy/process. This will be particularly important if they bring you an out of consensus view or one that goes against your own base case – you’ll be less likely to reject the idea if you have faith in their process.
- Performance: It goes without saying that you want someone who gets it right most of the time. Which is relatively straightforward, but can in some case be hard to measure precisely. One possible exception would be for those who spend most of their time writing contrarian research and out of consensus calls (as long as they are well founded). The other exception will be the old case of “getting it wrong, for the right reasons” i.e. they have a solid process that works long-term but will get the occasional call wrong. The other point is they can be wrong or right, but if their material adds value to your own process and decision making regardless, it can still be very valuable. It’s almost like a situation of are they giving you a model portfolio for you to pick up and run with or are they giving you pieces of a puzzle which you put together yourself? That comes back to your own approach and preferences.
- Differentiation/originality: In such a competitive endeavour as funds management, innovation, differentiation and originality is vital. You have to be a little careful thouhg, because those that are different just for the sake of being different can get a little tedious at times – so it does tie into the previous topic. But in a world where everyone often reads the same thing and where everyone talks to the same people, originality is important. So you want to look for the difference factor – original thinking and something different from what you get internally and from other sources.
- Presentation: One of the first distinctions I made as an analyst was the importance of communicating your ideas – you might as well not have any data, insights, or ideas if you can’t present and communicate it well. There is an element of it being in the eye of the beholder, but you want to see things like brief bullet points or “bottom lines” that give you the basic conclusion without you having to read every line of the report, and laid out in a way that makes the analysis, thinking, and conclusions clear. Well produced visuals help, as do things like bullet points. In my view, it needs to be easy to read and enable efficient assimilation of insights.
- Accessibility: Simple: Does it come in PDF? Or is it all there in the email? Do you have to log on somewhere to download it? This matters if you read the research on a device while on the go (e.g. on your commute, at the gym, during boring meetings ;-) or on the couch with a beverage). It matters somewhat less if you read it at the desk or print it. The other end of the spectrum is ‘super-accessibility’, which some providers offer i.e. being able to search across all their research online to see if they’ve covered an issue. Sometimes that can be done a bit more manually by searching the old emails, or asking the provider, which brings us to the next point.
- Access: Do you have access to their analysts? Can you call/email them and get an answer? Will they tailor research to meet your demands, concerns, and requirements? Is it normal for them to come and visit to present? (is that important? – it might not be if you just want a low-touch, hands-off approach where you just get the report and are happy with that) The topic of access is fairly straightforward, and will again be something that is of greater or lesser importance depending on: the depth of their research (e.g. where they have specific subject matter experts), market environment (can pay to get on a call when a certain market is on the move). It may also depend on your own internal resources e.g. leveraging off them in the case of you having a very small team or headcount limits. Naturally, this part will correlate closely to the next point…
- Cost: It needs to make sense, both in terms of budgets and the value proposition. You should expect an entirely different level of access and service from a $300 a year provider vs a $30 000 a year provider. Fees will necessarily be higher for those with a higher cost base and who are able to deliver more features (more staff, higher frequency of reports, more offices, more sales staff, greater access, etc). Fees will have some degree of signalling (i.e. high fees = high quality), but in the end, it’s a matter of weighing up the fee against the previous 9 factors, and the issue of budgets (financial budgets and attention budgets) as to whether it makes sense. Often times it’s a case of saying “how much do I have to pay someone for this service vs how much would I have to pay an employee to produce the same thing internally” (and most of the time when you ask that you discover why the independent research industry exists!).
Again, this is not an exhaustive list, and I would be very interested to hear your take on what you consider to be important to consider or indeed what you think the most important factor is.
This article was written by Callum Thomas, Head of Research at Topdown Charts.
Article was originally posted on LinkedIn.
