Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, June 16, 2011

Independent research on the rise

New research from CSFI says the pre-eminence of the formal sell side is under renewed attack from the independent research sector. This will inevitably change some of the targets that IR aims at.

A few years ago, at a financial conference in Texas – well, it would be – FD’s were asked what IR teams did all day. They answered “deal with the sell side”. This very depressing answer hides the important contribution that “analysis” makes. Whether of their specific company, of a generic sector, or indeed of an economic future, research and especially trading recommendations, coverage is important to IR teams as an important channel of communication with institutional investors.

However, according to CSFI and EuroIRP, independent research is a growing percentage of buy-side research budgets. In 2010 it constituted 25% of all research.

What’s driving the changes?

One reason is dissatisfaction with the sell-side offering. Of course, referring to “sell-side research” is a massive generalisation and the quality of output from the investment banks varies significantly. At the same, there has been a proliferation in the quantity of research that clients are bombarded with, thanks to internet delivery, across a growing number of platforms both office bound and mobile. Not all of this has been of a consistent quality.

Independent research therefore meets the buy side’s need for high quality analysis untainted by corporate bias and for research that is not widely available, which provides the investor with a market edge.

This is a double edged sword, however. The independent research houses, like every other business, need to grow, yet if it becomes mainstream, the value of that information drops. The more independent research remains a niche, the more benefit it is to the buy side.

The research notes that expansion must, therefore, be through product diversification by area of expertise, sector or geography.

And the regulators? Five years go the FSA introduced their new regime on unbundling. However the independent sector must still contend with an uneven playing field. For example, banks’ leverage of corporate relationships to provide corporate access. Estimates are that corporate access now accounts for about 25 per cent of commission dollars paid for research and “advisory” services.

So how do the independents make money? Mostly this is a combination of hard cash subscriptions and Commission Sharing Arrangements. CSAs are designed to allow fund managers to choose a broker for execution and direct the research portion of the commission to another research provider.

And the implications for IR teams? As always, ensuring that levels of support to all analysts – sell side or independent – are offered. However beyond that, being aware of the potentially different – more in depth? - need for company information are met, and the opportunities for proactive outreach to this group.


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