Little Value in Sell-Side Research, Managers Say

Money managers are changing their use of sell-side reseach in major ways, a new report shows.


As active asset management is buffeted by headwinds — mediocre performance; the rise of indexing, quantitative strategies, and big data; looming regulation — investors are favoring shorter-term, quantitative investing techniques from their research providers and are less interested in traditional recommendations for individual stock-trading ideas. That’s according to a new study, “Quantifying the Future: Investment Recommendations Go Digital,” released last week by financial technology firm TIM Group. For its study TIM Group interviewed fund managers representing $5.6 trillion-plus, as well as brokers and other market participants.

The upshot is that today’s asset managers are using sell-side research much differently than they did in the past. According to the report, a whopping 66 percent of respondents value sell-side research to a small extent or not at all, and 61 percent already are aggregating market sentiment — as a means of understanding prevailing views or counteropinions — rather than using individual research recommendations. A full 94 percent of respondents, including those who work at fundamentally-focused investment firms, think funds using quantitative research techniques will become more popular.

“The old-style relationship based on written research and conversations between buy and sell side is therefore unstable,” write the report’s co-authors, Niki Beattie and Rebecca Healey. Beattie founded independent consulting firm Market Structure Partners; Healey heads up EMEA market structure and strategy for trading network Liquidnet.

“While demand for access to investment recommendations remains strong,” the authors write, “the delivery and consumption of these recommendations is undergoing a radical transformation.”

Radical enough to shock experts: Beattie tells Institutional Investor she was surprised by how little buy-side firms said they value research from the sell side. More and more, she says, the buy side is conducting in-house research and looking to the sell side for “a set of cumulative ideas” to cross-check its own views against.

TIM Group founding partner Colin Berthoud says changes in investor behavior are having a knock-on effect in terms of how managers use sell-side ideas. “The move to passive puts pressure on the active managers; the active managers are looking at how they can improve performance,” he says. “Quantitative techniques are becoming the accepted means to do that.”


Factor in regulation and the abundance of data, Berthoud says, and “that adds even more information and moves more market participants into the quantitative world. It adds up to the move of processing information differently.”

More big changes to the sell-side model are expected to come with the January 3, 2018, implementation of Markets in Financial Instruments Directive II (MiFID II), the latest iteration of EU rules affecting service providers (such as research shops) that serve clients trading financial instruments.

MiFID II requires investors to account for exactly how they spend their research budgets. Unbundling research from brokerage firms’ overall offerings means clients will have to opt in — and purchase — the service as a stand-alone product. The regulations apply to any firm that does business in the EU. Less than half (43 percent) of investors surveyed by TIM Group say they are EU-based, but only 31 percent believe they fall outside the scope of MiFID II. The majority (56 percent) say they plan to change their current processes ahead of the rule changes.

But the jig is not up yet for sell-side research, Beattie and Berthoud insist. Whether they are bulge-bracket banks or boutiques, research providers that are able to adapt to the new customer demands can thrive and take market share from rivals. How large that market will be once soft dollars disappear is an open question.