With costs set to be unbundled under MiFID II proposals, how much third party research will fund managers continue to buy in?
Opinions are 10-a-penny, so how many brokerages really add value and how do managers blend this deluge of information to help shape their investment outlooks?
There is a growing variety and number of independent research firms to choose from, according to Standard Life Investments head of global strategy Andrew Milligan, who is looking to vary his research resources rather than relying purely on the output of the big institutions.
‘It is important to emphasise we have to rely on a variety of sources now,’ Milligan said. ‘We look at research from investment banks but they have reduced their investment research capabilities in recent years. They still add value but we have to look elsewhere.’
The intelligent voices
Independent research and economic forecast companies Milligan points to include Capital Economics, Medley Global Advisors, Pantheon Macroeconomics, Pavilion Global Markets and Absolute Strategy Research to name a few. However, he is wary of a possible consensus view among such names.
‘There is a lot of good work done out there but there is a danger of the “Wall Street Consensus” as I call it,’ Milligan said.
‘Everyone will be talking about A-Z and no one is talking about one to 10 for instance. It helps that some of these firms have great teams with dedicated resources on single markets and regions and some firms will have sizeable links to government officials which can be useful.’
Off the shelf help
As well as independent research firms, there are a number of off-the-shelf systems that managers can turn to. Architas senior investment manager Nathan Sweeney said these can provide valuable research findings to him and his team.
‘For the fund-specific stuff we use a system called Style Research, which we bought off the shelf,’ Sweeney said. ‘Fund houses send their entire holdings into Style Research, which then analyses it all and shows us who is taking on the most risk and what other trends they can glean.
‘Another system we use is Morningstar, but that focuses more on performance, which is helpful. And there are websites that offer free insights and data we like to look over, such as Trading Economics.’
Like Milligan, Sweeney also uses bought-in research and picks out a couple of names for their macroeconomic insights.
However, he warns it can sometimes be better to focus on research companies that do not also have investment arms as this could potentially lead to a conflict of interest.
‘We use BCA (Banker Credit Analyst), which offers immediate qualitative analysis on economic data as and when it comes out,’ said Sweeney.
‘We also use GaveKal which is another independent research company, but we mix the two because BCA has some financial products, so it’s important to keep in mind there may be conflicts of interests.’
Henderson Global Investors fund manager Nick Anderson stresses the need for as much personal involvement and interaction as possible.
The Citywire AAA-rated manager of the Henderson Global Care Growth fund prefers to meet regularly with the research firms he looks to for insight.
Anderson said: ‘When we look at research, we find it is best not just to think of research as written pieces of paper. I think actually meeting the authors face to face adds a lot of value. Also, some research – on widely circulated economic data – can contain quite a bit of repetition.
‘Some firms can offer a real depth of knowledge – two in particular are Bernstein Research and Bank of America. They offer a lot of thematic research.’
Too much noise?
Brewin Dolphin group head of research Guy Foster is sceptical of economic forecasting, viewing it as ‘flaky’ much of the time, but he does see the merits of reading the views of those firms with a large number of economists on staff. However, he adds this still needs to be ‘taken with several tonnes of salt’.
Others are not convinced by the merits of independent research. Hargreaves Lansdown head of investment research Mark Dampier does not pay for any independent research, with his team preferring in-house bottom up fund selection. Asset allocation calls are made from an overview standpoint with Dampier preferring to focus on the ‘extremes’ of market events and trends that only happen once a decade.
‘None [of the independent research] adds value,’ said Dampier. ‘We find most economists are paid an awful lot of money to be wrong and most of the time, stocks are in no man’s land. Most external research is along the same lines. What I am interested in is how bullish and bearish sentiment is.’
Towry head of investment Andrew Wilson is also critical of most commentary in the market. Instead he opts for ‘leftfield’ research teams looking at unique issues in a different way.
‘It is more about deciding what to filter out than what to filter in,’ Wilson said. ‘The vast majority of commentary out there is either consensus or astonishingly bland – probably because it has been run through a compliance department first.’
Wilson picks out BCA, Rhombus Research, Louise Yamada Technical Research Advisors and Helmsman as some firms he looks to help to develop a ‘mosaic of different ideas’.
‘Rhombus provides a mix of quantitative and qualitative insight and Helmsman is much more based on economic cycles,’ he said. ‘It is about trying to find things that complement each other so it helps when people approach problems from different angles.’