Integrity Research – Outsouring as a profit driver

Research outsourcing
As sell-side research has shrunk over the past decade, asset managers have been faced with some hard choices about the provision of adequate research on which to base their investment decisions. Larger asset managers have, until recently, had enough funds available to increase their in-house research capabilities. This has been a less viable option for small- and mid-sized asset managers. Fund management firms, however, need to demonstrate the rigor and consistency of their investment process if they are to find their way on to the consultant’s recommended list. Hedge funds have to date relied on the skills and experience of their senior principals and when it fit their strategy, they concentrated commissions on sell-side firms that provided them with the best access to research. However, hedge fund seniors often find themselves with insufficient time to research all their ideas in sufficient depth to support a high- conviction trade.
Independent research has flourished in some niches; however, most firms have struggled to build sufficient revenue streams to support broad coverage with high-quality fundamental research. The independent sector is therefore a mixture of niche providers who focus on larger sectors and data providers which provide more information than in-depth analysis.
Facing a less certain future post 2008, many managers should consider outsourcing as a means of plugging the gaps in their research needs at an acceptable cost. Onshore seniors will always retain ultimate responsibility for security selection, but they may be able to make better decisions with better resourced support. Active managers have a wide variety of investment styles, and therefore there can be no “one size fits all” prescription with respect to offshore research support. Vendor selection should be based on:
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Amba White Paper – Outsourcing as a Profitability Driver in the Asset Management Industry_2009 October