Making sense of information
The US has followed the UK in adopting new regulations governing so-called soft commissions, and this is the first year that the new disclosure regime is in effect in the US. The ensuing compression of commission rates has hit smaller research firms hard, contends John Meserve, chairman of the BNY ConvergEx Group. At the same time, however, these firms are providing exactly the quality of research demanded by today’s fast-moving fund management world.
As research has been squeezed, coverage has fallen off - some of the S&P 500 are now covered by fewer than three analysts. At the same time, information is coming from different sources. For example, a fund manager interested in retail and wanting a complete picture will not just look at fundamentals but might also be interested in information from the shop floor, from consumers, from suppliers to the retailer - and the list goes on.
In addition to the new regulatory environment, hedge funds have been powerful agents for change in the research realm, says Nicholas Colas, director of research for the new service, BNY Jaywalk 360. “The shorter time frames of hedge funds have changed research. Now it’s about how fast and deep can you get into a company.
“There’s also been a shift toward experientally based research and away from ‘read and absorb’. In the past, there was the notion that to know a stock meant that you know what it’s doing today. Now, you know a stock if you met and talked with managers at all levels.”
“Today information is coming from primary sources, from access to experts, it’s coming in a lot of different ways. There has been a definite movement away from hard research inputs,” Meserve says, stressing that at the same time, “the ideas that money managers want are increasingly narrow”.
However, one result of the fragmentation and diversification of information is that fund managers (like all of us) are suffering from information overload. There is just too much information around, and filtering this information is a significant challenge.
BNY ConvergEx’s new service, BNY Jaywalk 360, aims to solve this problem. Jaywalk 360 is “where the information sources - the independent research providers (IRPs) join with the folks who need their information to add value,” as Colas described his new service.
sEsentially, Jaywalk aims to “matchmake”, to hook up IRPs, with their specific remits, with the fund managers that are interested in their research outputs.
Jaywalk maintains a network of more than 150 IRPs worldwide, which actively cover more than 7,000 equities. Of these, 5,500 are US securities and the rest are global.
When an IRP releases a research report, it sends it to Jaywalk. Jaywalk’s proprietary screening technology then channels a report of the research to any BNY ConvergEx Group clients which have identified a specific need for and interest in that particular research area.
In this way, BNY ConvergEx clients receive customised research that is matched to their unique investment parameters and areas of interest. “For the investment manager, it’s simplicity. For the IRP, it’s cutting through the clutter and getting the call through,” says Colas.
If a money manager decides to take up an IRP’s research, the IRP pays a commission to Jaywalk. This pays for the all-important warm lead. ConvergEx is the middleman in the deal, ensuring the IRP is paid. Meserve stresses that this in itself is a benefit, as many IRPs find it difficult to collect. “Money managers are reluctant to pay for research,” he says.
Money managers pay a fee based on the number of stocks covered. The lion’s share of money manager clients for the service is hedge fund managers, who tend to be the most responsive to non-traditional and independent information sources. “Independent research mirrors the intensity that hedge funds have,” says Colas.
This service fills a key need, and one that will be highlighted over the next five years, maintains Colas. “More hedge funds will be looking for more information sources, and more people will carve their own niches to provide this,” he says. As the number of information sources grows, a service that gathers these sources and also screens them, will become increasingly valuable to all parties, he believes.
For European money managers, the value in the service is that it gives them access to the American IRP network, which can be challenging to access efficiently, according to Meserve.
Colas estimates that there are around 400 to 450 IRPs of institutional quality in the US. Part of his remit will be to enlist more IRPs into the Jaywalk network.
In addition to filtering for content, the Jaywalk system also quantifies the track record of the IRPs in its network. This data, which is real and live, goes back four years and allow money managers to evaluate their reliability of the IRP proposing research.
In the long term, Colas plans to expand the range of the Jaywalk service. “There is a fantastic amount of interest in distressed, and this is a big opportunity for us,” he said. Once a company declares bankruptcy, the sell side drops it, but equities in bankrupt companies can represent a good investment. Fixed income reports are another possibility.