Post-Spitzer the world of investment research in the US and elsewhere is reeling, particularly as the issue of ‘soft commissions’ comes to the fore. Research is being shaken up, and JP Morgan is determined to be part of that shake-up.
In New York, John Phinney says the group’s clients have been requesting for some years a platform that would integrate all the fragmented services they are offered by different vendors. “We are now doing this for research,” he says.
“There has never been a systematic way of examining how the research craft actually comes together from a process and cost-effectiveness point of view.” While the research activity area is pretty standard, what varies is the level of third-party input that research analysts use incoming to their decisions. “At one end you have bottom up people doing information gathering on their own, at the other, firms bring in piles of third perspective and draw from this the best thinking,” says Phinney.
“We have introduced a new product ‘Alpha capture research’, which basically looks at a series of qualitative factors an investment manager might find important in reviewing and rating the effectiveness of their third party research providers.” There are, he reckons, around 200 serious research houses worldwide, covering some 40,000 equities, for example.
“The question is who is good in this mix?” JP Morgan believes it has created a straightforward approach to finding these firms. On the quantitative side, research firms are measured by for example, their ‘earnings per share accuracy on a time weighted basis’ – as that is key to some managers. Stock recommendations are looked at on a time weighted returns, to see how well investors have done in following their recommendations.
“Our third set of quant features are around what we call ‘communications frequency’.” Managers want to hear from researchers, for example, if subsequent events affect their outlook for an equity. In addition there are qualitative factors, such as service, knowledge and so on. “We think the quantitative will override the qualitative in time.”
“We now have a universe of data, we have collected ourselves, we regard as a proprietary universe we have put together,” says Phinney.
Every manager client is different in their requirements from research. Clients sit down and work through the quantitative and qualitative factors, assessing what is important to them, from which a consensus view emerges, he says. “They give this to us with a ranking of their criteria.”
Then JP Morgan uses its technology to find answers to the needs expressed, and come up with research firms with “the highest blended score”. “We aim to align what our clients want with what is available in the market place.” The indications are that the 80/20 rule applies, with most have good alignment with researchers, but there are the 20% with “horrific alignment”.
Managers will also want to know how their researchers stack up against the competition, and Phinney says some “navigation” can be provided for this too.
This service is part of the total cost management platform that will cover the trading, research and settlement areas.