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Episode Description

Kay Guest of Aviva Investors, Mike Carrodus of Substantive Research, and Joshua Maxey of Third Bridge discuss how to navigate the investment research market and get the most out of your budget.

Episode Transcript

Catherine (00:05): Welcome to the Signal, a podcast presented to you by Third Bridge, the world’s leading investment research provider, exploring how some of the globe’s most investable industries are facing upheaval. My name is Catherine Ford and I’m a journalist with a 20 year track record of reporting on a wide range of financial topics such as capital markets, developments and M&A. In this episode of The Signal, we are going to explore today’s investment research markets, what’s driving disruption and innovation and what the space might look like in the future.

(00:38): Here to help me discuss these topics are Third Bridge’s co-founder and head of corporate development and communications, Joshua Maxey, along with Mike Carrodus, CEO, and founder of Substantive Research and Kay Guest, broker relations with Aviva Investors. 

Hi guys. I’m delighted to have you here with me this afternoon at my mercy as we discuss the future of investment research. But before we get stuck into the conversation, I’d like to ask you for a few words of introduction, just so our listeners know how you fit into the conversation. Kay, tell us about yourself first of all.

Kay (01:11): Sure. I’m Kay Guest. I am the broker relations and corporate access for Aviva Investors. I started my career on the buy side about five years ago in this particular role, and prior to that I was doing corporate access on the sell side.

Catherine (01:27): Brilliant. Thank you so much. Mike, can you tell our listeners about yourself, please?

Mike (01:31): Absolutely. Mike Carrodus, CEO and founder of Substantive Research. We offer independent comparison discovery on investment research ESG and market data pricing and products. And previous to that I was in independent research and publishing.

Catherine (01:50): Okay. Thank you so much. And finally, Joshua, can you tell our listeners about yourself, please?

Joshua (01:55): Yes. Joshua Maxey, one of the cofounders of Third Bridge. We have a primary research product that works with the buy side and managing and consulting firms, so we provide expert networks. We’ve also got a large suite of content products that we sell. And we’ve been in the business for over 15 years now. Before that, I started my career on the buy and sell side at some of the large bulge brackets based in London.

Catherine (02:21): Fantastic, thank you very much. Now the theme of our podcast has been how certain industries are being disrupted. And it’s fair to say that the investment research industry is one of those key industries that we’re seeing an awful lot of change in over the last couple of years, and the expectation is that it will carry on changing over the next few years. Can we kick off the conversation by having a look at where the market is at the moment? And Mike, I’d like to ask you first of all, can you talk to us about who the key consumers of this market are and what do they specifically want? What are they asking for?

Mike (02:54): The key consumers that we’re familiar with are portfolio managers at long asset managers and also at wealth management firms and of course hedge funds and their exact needs depend on the type of assets and securities they’re investing in. But the bulk of money paid for research is for equity research covering corporations in various regions and various sizes within various industries. 

I’d say external investor research serves one of two functions. You either use it to fill gaps in your own team’s knowledge and capacity to follow certain securities on markets or you use it as an overlay to test your assumptions, expose yourselves to different approaches and opinions. There’s not many raw materials when you’re investing in things and researchers are a very important one.

Catherine (03:37): And when we think about what they’re asking for, has that changed over the last say five to 10 years?

Mike (03:43): It went through a long period of not changing very much and now is changing very rapidly. The change at the moment is significantly around formats and channels. As a research provider, you’ve got to go where your clients are and increasingly they’re on different devices consuming things in different ways. So I would say at the moment the biggest change is those young rockstar, late twenties portfolio managers, how are they consuming content? And I think that’s been a really interesting journey and probably when we’ll go into more and obviously data and how that overlays the research message and supports it is also equally a driving trend.

Catherine (04:23): Thank you very much. Kay, can I come to you now? Talk to me about who the key market participants are and what they provide. So if we flip the question around from what Mike told us, who are the key players from your perspective and what do they offer you?

Kay (04:37): Throughout my experience, I continue to see the key market participants as the bulge brackets. And this is because they have such a broad coverage across all research offerings. So for example, I look after equities, multi-asset, macro, and credit research consumption.  And nearly all the bulge brackets are providing those teams. However, when we split it down into different research projects, there are some investment teams who see so much value add in independent research providers and are continuing to create competition amongst the bulge brackets. 

So for example, getting feedback from a portfolio manager sat outside of the equities team – they explained that they mainly use independent research providers to cover areas of expertise that they don’t have enough depth in within the team, which is seen as really value add. And when we look at what the key market participants are providing, we’ve had their advisory services being described as experienced analysts – analysts with experience of over a decade.

(05:50): And I think that’s a really important one because of the sheer volume of research an investment professional receives – that salesperson can really make an impact in directing them to getting the most relevant and best research for their investment strategy. 

Then I guess on the written content side, last but not least, it’s that whole thing around differentiated research and that will mean different things for different funds. But really it’s challenging what everyone else is saying with a good reason. So for example, ESG embedded into the research is not something that all brokers do. And here at Aviva that’s really important because within all of our asset classes there is an ESG overlay. One analyst described differentiated research which focuses on longer term structural drivers and that’s really important to their investment style.

Catherine (06:46): You spoke a little bit about that niche offering that you are looking for. How does niche and differentiated research work, is it something where if you are looking for that differentiated research you go to a niche provider and if you’re looking for something broader you go to the bulge bracket or how do those two marry up?

Kay (07:01): Generally? Yes. I think the niche independent research providers are very sector or region specific and they focus on a specific strategy. Whereas with the bulge brackets it’s a lot more broader coverage.

Catherine (07:16): Thank you very much. Joshua. I’d like to bring you into this conversation. We spoke right at the beginning a little bit about how the market has changed and one of the reasons that it’s changing is that we are seeing this huge level of innovation within the space. Can you talk us through in the area who’s doing the innovation and how do we actually get to the point where we have to see this innovation to stay at the top of the market?

Joshua (07:35): Well, so first of all, my vantage point is a little bit different than Kay’s because we’re also exposed a lot to the hedge fund community and of course the large alternative asset managers in the private space. So there are certainly some slightly different trends that we are seeing.  

Certainly on the hedge funds. I think there’s been a long term sort of shift towards more independent and alternative data sources being used as part of the research process. I wouldn’t say that there’s much innovation happening from their perspective in terms of the bull bracket banks. They have been trying hard to compete. But I think if you set that against some of the trends, there’s some well documented statistics out there suggesting that headcount on the sell side has gone from 4500 to about 3000 over the last 10 years. So there’s been quite a large exodus of talent that’s left the sell side and those individuals, especially the ones who had a well-known name, would set up their own firms.

(08:35): And that’s really started to create some interesting trends in the research space. Of course there have been a lot of alternative data providers and I think it’s a very fragmented market. There are a lot of smaller names out there doing it. And so we haven’t really seen many of those emerge into large players. 

There have been a few on the mobile data side for, but even those have become a little bit challenged with some of the regulatory pressure and focus on those – in terms of ‘how do they source their data?’ 

So in terms of innovation, I mean we obviously sit in the primary research market. We’ve seen that market grow tremendously. It’s doubled over the last few years and we are definitely hearing that there’s more of a pull from the buy side to explore more primary research products. And we at Third Bridge we have been trying to innovate on the content side and trying to extract more content from the experts using their human insights. But I think there’s definitely a lot of innovation happening and it’s still too early to tell which segments will prevail in the long run, but I’m certainly excited about some of the new things that we’ve been seeing.

Catherine (09:42): Joshua, if I can ask you just to take a step back and talk to me about how we arrived in this slightly new landscape when it comes to investment research. One of the key drivers I guess would be Mifid II. First of all, is that a correct understanding or are there other forces out there that have driven this change in the landscape?

Joshua (10:00): No, I mean Mifid II has absolutely been a driver of this and when Mifid II was enacted, we were getting phone calls from even some of the larger buy-side firms saying we think now is the right time to explore primary research, for example. 

So I do think that has happened, but I do also caution that statement a little bit because we’ve seen this in the past – where there’s a lot of excitement. The independent research community’s going to thrive from regulatory change and then it hasn’t really happened.

Mike (10:28): I would definitely echo that because our perspective is looking at budgets and pricing and that whole side of the market of how the money’s flowing across different providers, across different types of providers. And I think one of the most interesting things is how little the trend of great concentration into a small number of bulge bracket firms has changed even with Mifid II coming in and completely revolutionizing the way research is valued and paid for. 

And I was accused of being the voice of doom earlier on today with a client – because I’m always coming in and showing the deflationary effects in a research market.  Because this was a huge market that was oversupplied and Mifid II has definitely addressed that. 

The question is what has it done to the competitive outlook? And I think the interesting thing is if you’d been an independent research provider in 2016, you’d have been looking forward to Mifid II thinking that it was going to help you do business because in the end you were corralled into this small world of independent research that was generally paid out of a hard dollar and then all this commission driven money was going to brokers with the multiple in terms of the amount of revenue that was being allocated around.

(11:39): And so sure enough, the regulations come in and drive a focus on value and a focus on quality as well, I think. But at the same time, I think the first reaction was one of panic of, oh my goodness, we’re probably going to be cutting our budgets a little bit because this Mifid II drove a lot of research budgets onto the P&L of asset managers. 

And so in the end, what you’ve had is a situation where actually the bulge brackets have played a very clever hand, kept their concentration levels up despite a brain drain in a lot of the analyst community, and actually in independent research, yes, some of them have thrived by being clever and differentiated – but equally it’s tough out there and I think that’s gradually changing now. 

I think we’ve got to a more mature phase in all of this, but I think definitely it’s been very interesting to see how the supply side of this market has really changed. And yet not quite yet have we reached a place where this market is really liquid and fragmented.

Kay (12:41): So I would just say that I do definitely see the teams valuing independent research providers, and over the past couple of years I’ve noticed in broker reviews, a constant feedback to the bulge brackets has been that there needs to be more differentiated research. You take the top five bulge brackets and get a note from each one on the same stock and it all said the same thing.

Joshua (13:06): Kay. I would just add on this when I was on the sell side, there was the same mandate, no more maintenance research. And then we stopped doing maintenance research and the head of research would come over and tap us on the shoulder and ask, what are you doing? Why didn’t you do an earnings update yesterday? 

And I think the problem has been that the sell side is ultimately funded by short-term trading shops and a lot of the revenue is generated off that. And so they’re in a little bit of a tricky situation because what’s paying the bills is incentivizing them to produce more short-term centric research than longer thematic work. And I think that’s been one of the challenges why they haven’t actually done it, because it’s been discussed so many times.

Mike (13:47): And the other side is we see a theme of the buy side taking control a lot more. So the larger buy side organizations that we’re familiar with that we do a lot of work for, they’re actually becoming a lot more self-reliant as organizations. 

Gone are the days when a few sell side notes drove your investing day and they have their own internal indicators, work, research departments, etc. And I think they are also creating integrated dashboards where they take in data, they take in their internal research, they take in the external research and they end up with young resourceful portfolio managers actually creating quite an exciting process going forward. So I do think this concentration dynamic is not something that necessarily will be there forever. I think it is part of what feels like a transitory phase right now.

Catherine (14:36): Kay, can I just come back to you with a question? Because considering all the information that is out there, all the different providers that are out there, how do you go about when it comes to the allocation of your budget and the overall size of your budget?  And then how do you deal with relatively new issues such as ESG and sort out the information that you need to make investment decisions?

Kay (14:57): So overall, budget is always a difficult one.  In terms of allocating the budget, that’s where a broker review methodology really helps. 

So understanding what exactly your teams are valuing and using, and I actually like to do a broker review with a very qualitative overlay, but a lot of brokers will bring so much consumption data and say, your consumption has gone up by X percent, this means we need this much money. 

And you kind of sit back and you look into the weeds of that consumption data and there are things like IB chats, electronic communication via email, and when you then go and speak to the teams, they don’t even respond to some of these IB chats or emails. So you have to marry up how the buy side and the sell side are talking to each other. And actually I think getting that feedback from the PMs and asking, okay, what are you really liking about this provider?

(16:03): And there has been a situation recently where we have discovered that our allocation of our budget is a little bit all over the place – and we’re reorganizing that and we want to continue to incentivize the sell side. So if we recognize that we are ranking a broker in our top 10, we want to reward them, but again, we have to stay within budget. 

And then it gets quite interesting when we talk about new agreements and independent research providers coming in or industry experts coming in. And it does sometimes get to a point where if we are at maximum budget, I will go to the teams and say, okay, you want this provider. Who are you willing to switch off to get this provider? 

The ownership has got to be on the buy side to kind of spend their money wisely. And in terms of the ESG aspect of it, we really look for those brokers who embed the ESG research and they are out there, it’s just plugging them together – so that transparency from the buy side to the sell side has to be there.

Joshua (17:19): Kay. Can I just ask a follow up on the back of what you just said? I mean, do you find yourself doing substitution most of the time and have you seen a change in that since Mifid II? Like an independent switches in for a traditional sales side – or is it a slightly different dynamic than that?

Kay (17:36): Yeah, we’re not quite there yet, but I think it will come. It depends where you are on the buy side. There are some buy side firms who have amazing systems in place and platforms built which monitor how much it costs to speak to a sell side individual per minute. 

And they have all these tool systems in place, which is absolutely great, and they can see exactly where they’re spending their money. Then you have other buy side firms who perhaps don’t have those systems in place and need to get them or something to replicate a methodology like that to understand it. So us as a firm at the moment are in that process. We’re evolving. And I think systems and the technological infrastructure is so important.

Mike (18:27): I think it’s really interesting you’re talking about the zero sum game, the switching and switching out. Because obviously with a decreasing pie the market share dynamics become interesting. 

And obviously it’s fascinating when you see so many different buy side organizations having very, very different ways of valuing and rewarding research. 

Some, as Kay said, some are very qualitatively driven, some are very quantitatively driven – and there is everything in between. Some are very ex-ante some are very ex-post. So it is a real challenge as a provider to understand. And I think as a provider you need to try to understand in order to be able to maximize those relationships, you need to understand how they tick from a budgeting allocation perspective.

Catherine (19:10): Can I just pitch in here because Kay, when we spoke earlier on in the week, there was a conversation around pay as you go versus an all you can eat approach when it comes to contracts. Can you talk us through how difficult it is to evaluate those two approaches in comparison?

Kay (19:27): The easiest way to value research is through the pay as you go model. Because you are empowering the investment professionals to allocate whatever system methodology you use, whether that’s a dollar value or a point system to a sell side individual. 

And then that is what the investment professional knows that they are paying. I think the risk you run with those all you can eat agreements, is that it gets a little bit lost in terms of what you’re actually paying for. So I definitely say the pay as you go model empowers the investment teams more. But then sometimes when you are covering all asset classes and then you do a big kind of all you can eat agreement, that’s also very accommodating.

Catherine (20:21): Thank you very much. Mike, I’d like to come back to you on a point that you made earlier on in the conversation – you were talking about rockstar asset managers. And I’m sure they’d be delighted to hear themselves described as that. 

And then you went on to talk about how they consume data and how they consume information. Talk us through how technology and the use of technology in this space has changed – and whether you see a generational shift… Whether there’s a certain type of consumer in the investment research space that just consumes data completely differently to what it was like 10, 15, 20 years ago.

Mike (20:53): And this is a really interesting area because there’s a lot of differing opinions. So I was at an industry event with a handful of buy and sell side people and one of them was talking about how innovative they were becoming by creating little video clips and making sure they reached clients through LinkedIn or various other channels. 

They were doing stripped down publications – just with charts and bullets, which you could then click onto a video and everything in between. 

Lots and lots of exciting optionality I suppose in the type of form of content that you are consuming. Someone else said, and this is unsurprising because this younger generation’s coming in and they like getting their own hands on data, they like integrating things and they’re not quite so keen on consuming page after page of text – which is a very traditional way of consuming investment research.

(21:51): So someone else said, ah, that’s because we are in a trending bull market, this is a while ago. And when everything goes crazy, those youngsters will scurry back to the people that can provide context and wisdom and who’ve been through a few cycles and they will pounce on those long form articles once again. So here we are, we’ve had some time, it ain’t, they are not. 

So that wasn’t true what that person said, it didn’t happen. They’re still being resourceful and mixing different formats and asking for more integration of inputs and responding to more easily digested ways of messages coming across.

Joshua (22:40): I think just to add on that, it’s clear to me as well, and this is what I’m seeing from our clients, they want to have discoverability search that is as easy as possible. I’ve been quoted on this before, but two-thirds of our analysts and private portfolio managers are millennials. 

And that is a really interesting stat because those are individuals that were brought up with gaming, immersive gaming experiences. And another trend that’s been happening is that a lot of the buy side has hired their own bench and increased that part of their research function. 

And so I think the needs have changed for the buy side in terms of getting access to data that they can use themselves. And anecdotally I’ve heard that there’s a number of alternative data providers that are constantly knocking on the door saying, we’ve got signal in our data and the buy side is just saying, I don’t care about it, just give me the data and we’ll have a look ourselves.

(23:37): We’ll tell you if there’s a signal or not. So there’s a big difference there and I think that just tells you how the buy side is just wanting to do that work themselves. And it goes back to, I guess at the end of the day, if you do see signal, you want to keep it to yourself. And the minute it becomes pervasive in our industry we’ve got this odd dynamic where the more people that use it – obviously the less valuable it is in a way. So that always is one of the opposite driving forces in being able to mass produce and mass sell your research.

Mike (24:08): One thing I think with what we’re hearing is – I always try and keep in my head, what’s the thing that someone’s listening to this and sort of screaming at the podcast, but what about this? 

And I think the thing that is a candidate for that is – what if you’re a smaller asset management manager? What if you’re a small firm? You actually do lean on the sell side, you lean on them for corporate access. You do actually really value a handful of bulge bracket relationships that kind of keep the system going day to day. And yes, you have some differentiated work. 

So I do think we are entering a bifurcated world now. It’s very difficult to be a smaller asset management company in this environment and in the regulatory conditions that are out there. 

So I do think that the interesting thing for me is how these large organizations on the sell side are going to approach the situation. The larger organizations, much more self-reliant, much more picky and choosy about what’s going to add value to their process. And then the smaller firms which actually aren’t providing the majority of revenues are actually still very much reliant. So there seems to me a disconnect there and I’m not entirely sure how that plays out. 


Catherine (25:14): Kay, can I ask you to pitch in on the issue of corporate access because I know you’ve had some experience with that.

Kay (25:19): Yeah, sure. So I’ve definitely noticed for us – we no longer have an equities presence in the US and our global equities team is sat in the UK. They are wanting to see US based companies. It’s a lot more difficult for us to get that access and I think it’s a different culture as well in the US with corporate access. The pricing is different, the mentality around it is different. So when signing up to a conference in the US that was through a US broker.

(26:00): There was a lack of understanding on the regulation. Now obviously MiFID two states that you must separate your research and corporate access costs. And so there was some back and forth in saying, we’ve got a corporate access rate card, we will just use this. We do not need to sign a full research 12 month agreement locked in when we don’t necessarily want it right now. But it was just one of those situations where it was, okay, so our platinum clients are paying this much, which means this research agreement is this much, much and this is the access that they get. So it’s such a completely different ballgame.

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Catherine (27:24): I’d like to move the conversation along now and have a chat around the workflow of the different investment research consumers. Mike, can you talk to us about the different asset classes and what their objectives are when it comes to the consumption of investment research?

Mike (27:39): Well, that’s a big question. So I’ll give you our perspective. We’re looking at how they’re consuming, how they reward it, frequency of consumption, those sorts of things. So when it comes to the equity markets, what we see is that the vast majority of what people are paying for – that’s where the real pricing is. They are having quite high touch engagements with their research providers. So there’s lots of meetings, lots of phone calls, lots of messages, and these can be driven around certain time periods and certain catalysts in the market. And so what that does is that creates a situation where a lot of the people providing equity research are asking for money based on how much they’ve been used. So the number of meetings and amounts of consumption and all those sorts of things. And then you have that slight disconnect where a lot of the people valuing the research as buyers are looking at the penetration of those messages into the investment process.

(28:40): You could have had a hundred calls with someone, but they might have all been rubbish. So did they really help? Did they really go into your decision making process? So that’s the type of situation you’ve got going on in the equity markets

In the fixed income markets, engagements and interactions are less of a driver on both sides. There’s a focus on different types of models obviously, but really the amounts of money that are moving around based on fixed income research are a rounding error in comparison to the equity markets. 

And then you’ve got macro, which is a whole other island, and that’s where a lot of independent research thrives, but equally has had a tough time. Now in recent months and the last couple of years, macro has suddenly become a really important driver. You may look at a certain sector or stock and make a really good decision relative to other sectors or other stocks, but if the whole world’s going in one direction, then that’s going to affect your returns more than anything else. And that’s recognized in a focus macro, but one that has taken a while to flow through to the way money moves around.

Catherine (29:47): Thank you very much. Kay, from your perspective, what are some of the tools that you guys are using? Can you talk to us about some of the fragmented insight that we’ve already spoken about earlier? How much of an impact does that have? And then also the perceptions – how different teams view different tools?

Kay (30:04): Yeah, sure. So I’d say in terms of tools, it’s still early days. Everyone seems to still be wanting to centralize research access, but we haven’t quite got there yet. Search is a really big one for user experience, just with the sheer volume that they receive. 

I guess tools as well could fall under industry experts. That is a different category of research and it’s almost seen as a tool for when you are looking at an idea. The teams have definitely mentioned industry experts as value adds. There’s market data that is forever growing. 

I will go back to my point earlier about the value of a sell side individual, whether that’s a salesperson or an analyst. So speaking to some of the team earlier this week and just getting their thoughts on how they deal with the volume of research, it’s definitely a challenge and there are definitely some systems which are better than others. And that is where it’s really an opportunity for the salesperson to come in and help direct that investment professional. So if you could put salesperson as a tool, I would definitely put them as a very good tool.

Catherine (31:26): Can you just quickly also talk to us about the differentiating perceptions that different teams within your organization have towards research and research providers?

Kay (31:34): Yeah, sure. So I think it’s just kind of echoing what Mike said, and what we’ve said at the beginning is that multi-asset macro, it’s definitely independent research providers. Valuing research equities, it’s more interaction driven and then credit is an interesting one. 

The landscape of that regulation has changed a lot. And so with the FCA announcing the change last year that some UK research no longer has to be paid for, that’s changed the value again. And it does raise questions amongst the teams. Especially amongst credit whether they should be paying for research when there has been this change.

Mike (32:14): But Kay, how annoying was it that macro didn’t get covered in that carve out?

Kay (32:18): Yes.

Mike (32:19): I’ll summarize it for the client base. We had our clients go, you are kidding, we thought we were getting a Christmas present and there was a very annoying piece of coal included, which made the whole thing more disappointing, which was fine. 

You can rebundle your fixed research payments, in other words, just not, you don’t have to pay for fixed income research in order to be compliant. But we’ve decided that macro research isn’t necessarily fixed income research, which by the letter of the law is correct. If someone tells you a country’s going south, you might sell the equities as much as you might sell the fixed income. But in reality, the way this market works, the way brokers price and package their research – macro is put alongside the fixed income product, which means that no buy-side organization has an easy way, simple way of saving a bit of money and reducing some operational cost and risk. So it was a really unfortunate piece of good news that ended up being a bit of a damp squib.

Catherine (33:19): Joshua, can I bring you back into the mix? Because you are obviously in constant contact with the consumers of investment research. What do they tell you that they want more of and where do they say thanks? I think we’ve had quite enough of that. Thank you very much.

Joshua (33:33): I was just reflecting on what Kay was saying. If you go back to how expert networks started, it was on the back of analysts being frustrated that they would have to read a hundred page research reports when they actually just wanted to speak to the author directly themselves. And that’s actually what started the idea back in ‘98. Why don’t we just put them in touch with the industry expert and they can ask their own questions. And I guess that is something that we still see now and that is very much still in demand and it has a lot of analogies with the sell side analyst versus their output. 

I think what’s been an interesting trend is just on demand consumption and within that audio for example, is playing a much larger part. I think that was also exacerbated through trends with the lockdown. 

(34:33): Podcasts are another thing that I think is being much more consumed now. I mean we are doing one here now, but for sure, I think there are a plethora of podcasts – it’s amazing when you go online and just see what’s out there now, there’s just so much more of it out there. 

And actually I’ve even seen sell side firms creating podcasts now. So I think people are kind of jumping onto that trend, but I can tell you now one of the frustrations, what they do not want more of is more portals to have to log in to. 

This is one thing I hear about a lot. Clients say just don’t talk about another portal, please. And I think what Kay said resonates with me. Searchability is a big factor, being able to just get to the information fast because there’s just so much of it out there – and I think there’s been some interesting developments in the industry as a whole to try and tackle that.

Catherine (35:36): Joshua, you’ve led us very nicely into our final area of conversation talking about what the market will look like in 10 years from now. Mike, are we going to see a wave of consolidation? Are we going to see certain types of research becoming stronger? Are we going to see certain types of players drop out of the market completely? Give me your view of what it might look like in the future.

Mike (35:58): I’ll start with a disclaimer, which is I’ve predicted a lot of things in the past and obviously always been a hundred percent correct on everything.

(36:07): Who knows, especially when regulation is involved. But here’s what I do think is an emerging trend, which I think is gathering momentum and I think will not reverse. 

And that is that the model of being able to sell research as a standalone product and have a profitable business is changing rapidly. 

And if you are not an organization that’s at the forefront of modernizing that or with some differentiated content or something, that means that that can make sense for you. If you are in the more traditional space as a research provider, then you are probably going to seek shelter in one way or another in the next two to three years. And we’ve already seen it. 

We’ve seen lots of moves in the market where people are going to what I would call a more subsidized model. Now the great thing about being at a bulge bracket firm in the research department is you have external clients, but you also have internal clients and you could also to some extent be described as a loss leading function to a level for other businesses within your building.

(37:15): Now if you don’t have that then and you’re looking around at the moment, and you might be tempted to have a little bit of that. So you can see deals going on in the market where people are becoming part of wider umbrella organizations and therefore they’ll have the freedom to produce products, perhaps even become even better quality. 

But equally, it’s a different model and it’s a different way of doing business. And I’m not sure it’s what everybody intended when we went down this road on the Mifid II. I’m not one of these people who’s always bashing Mifid II, but I think you do have to understand what happened. 

Yes, in Europe, a lot of investors saved a lot of money, but equally competing in this market, launching things in this market, being differentiated, diversity in this market became more challenging. And I think as this model goes forward, you’ll see certainly in the midterm, lots of the more independent world become less independent.

(38:09): The key thing I would say as a second trend is data, data, data, data. We see two budgets at Substantive and we help people with those two budgets – and one of which is a data budget and one of which is a research budget. And we see the research budget under pressure and a lot of structural change going on, and we see a data budget going up, up. 

And so what I think is going to be interesting is the latest trend seems to be that research budgeting and data budgeting is starting to report into the same heads, which means they’re going to be looking at these things from a more holistic perspective going forward, which means that if you are a research provider, you better be involved on the data side. Either extracting data from your unstructured content or aligning yourself with data sets and helping people make some sort of understanding of what those data sets mean. And I think that’s all very underdeveloped at the moment and very exciting.

Catherine (39:04): Okay, well, we’ll see in the future. Kay, can I bring you into this conversation and come back to the issue of user experience. When we spoke earlier in the week, you spoke an awful lot about accessibility of data. So while there’s loads of research, while there’s loads of research out there, it needs to also be accessible because there’s no point in having that hundred page document, but actually you are not getting that little bit of nugget, that little nugget of information out of it. Talk to us about what you would like to see when it comes to user experience going forward.

Kay (39:35): I would like to see our brokers and providers listening to what that particular investment professional needs, and it’s not going to be the same for every single one.

Catherine (39:47): That sounds like a very personalized approach that we’re looking for here.

Kay (39:51): Yes, totally.

Catherine (39:54): Joshua and Mike, are you delighted about this?

Mike (39:56): Well, basically I was wondering whether Kay was saying that through gritted teeth.

(40:02): I’ve said it before, I’ve said it again. I’ll have to say it in the future. 

I mean, when I was an institutional salesperson, I thought I listened. I mean maybe I didn’t. I mean think I listened, but I think one of the things I was shocked with is when I moved into investment research earlier in my career was how inert the product was. 

So you had these people who were very well respected and they were treated like rock stars. You’d go into a meeting and the fund manager would have the book that the analyst had written 15 years before and say, oh, this is what got me into the business. Please sign it. 

So that person being told by a bunch of salespeople, oh, you need to change what you do because people are changing the way they want to consume it. That person doesn’t feel like that. They’re going into stadiums full of people telling them they’re fantastic.

Catherine (40:52): And does it come back to this generational shift that we spoke about earlier? Is this something we’re actually, as the veterans in the space move out and as millennials move up, we will see a different sort of approach?

Mike (41:05): I suspect, but you never know. I mean lots of times you expect lots of change in markets and things tend to sort of tick over for a while, so things take longer than you think often. So I wonder whether it just does tick on and doesn’t change as much as I’m suggesting. But the data move is big and important. and the self-reliance of the buy side is also big and important, so that has to change things. And so if you marry it with a generational shift in preferences, of ways of consuming things, then that all adds up to a different picture.

Joshua (41:37): One thing we haven’t really talked about is sort of push versus pull, because I do think that the newer generation of consumers on the buy side are just much more used to pulling. And again, it has synergies with what you’re seeing in TV cable, right? It’s like on demand – what you want and you watch it when you want to watch it. 

And so there’s a bit of that going on. They come to us and they know exactly what they want and I need you to help me with this and that, and I want you to find me those experts. I want you to find me that data source. I think that is what’s changed. 

And the other thing we haven’t talked about is bias, unbiased independence versus the bias concern. And I think coming back to what Mike was talking about with regards to fragmentation and potential consolidation, I think this has always been one of the hurdles because we’ve obviously seen Bernstein getting bought recently and Autonomous were bought prior to that.

(42:38): And there’s always that concern that there’s going to be more bias in the research. 

And there’s the holy grail of distribution of benefits that you get from being attached to a bank. But I remember it wasn’t that long ago when Goldman Sachs had the Hudson Street platform, which was basically taking stakes in independent research providers. 

And Goldman was then also brokering and selling independent research and it didn’t last very long and they closed the whole thing down because the sales team just didn’t know how to integrate that into their workflow and model. 

I think there’s a lot of challenges with banks acquiring independent research firms, and I am, as you can tell – I’m not very positive about it, let’s put it that way. I think there’s a lot of value being destroyed in those transactions to be honest.

Catherine (43:22): Joshua, I’m going to come back to you in a second just to wrap us up, but I want a little bit more from Kay. So talk to me a little more about the user experience and specifically the importance of accessibility. We spoke earlier about there’s no point in just having a hundred page research document and saying good luck and see you tomorrow. Talk to us about what accessibility really means from your perspective.

Kay (43:44): First of all, you need the research agreements in place with that broker to access the research. Then once you have access, what I find the teams really look at is if you’re an established portfolio manager, you’ll quite often know who you want to go to, what you want, you’ll have long standing relationships. 

And then with the junior analysts, you kind of have more of an approach where you sign up to a lot of research and you sign up to distribution lists via email, Bloomberg Chats. You can access the research via the Bloomberg portal or log into the broker portals. There’s lots of different channels to do this, but I think for the teams, it’s having the channel that again tailors to their needs. 

So for example, we have one portfolio manager who is not interested in going via the broker portals. All they want is it on Bloomberg portal and that suits them and they’ll see it in a kind of news format and that’s all they need.

(44:57): Others will like the broker portals because they have different tools and functionalities in there which they can play around with. They can download the models. I think it depends on how the user’s investment style is, but I guess what I was just trying to say with the help of a salesperson is as much as this business is about markets, it’s also very people driven.

And I don’t think that’s going to change. And I used to look at the portfolio managers who had been around for a while and look at their longstanding relationships and they wouldn’t nudge from those relationships. It’s really hard to get in. Brokers would come to me and say, how do I contact this PM? I’ve been trying for years. I can’t crack them. And it is hard. I get that. And perhaps maybe on that side it’s a little bit more opportunist, but I do think that starting with a junior analyst and just building that relationship up, getting to know what they like, and that may take six months, it might take 12 months, but it’s resilience and perseverance.

Catherine (46:09): Joshua, I’d like to wrap up the conversation by asking you to talk us through what you think investment research will look like in five to 10 years with regards to visualization integration and client architecture. Can you do some crystal ball gazing for me now as well, please?

Joshua (46:26): Well, I’ll try my best. I mean, I definitely think that we will see more demand for integration of research into clients’ own repositories, and it may be that they want to run some algorithms over it or it may just be for easier search on their side. 

But I think API feeds and ability on any research provider to offer that are going to be a must. And I can see that already happening and we are seeing that demand from our clients. 

I think integration into a client’s workflow can mean different things, and I think Kay just elaborated on a couple of ways of how that can manifest itself with clients. That can also mean more aggregation platforms being required, more personalization, watch-lists. So I think all of those are part of that sort of customization story and personalization that just clients will want. And I think we’re already getting there to some extent.

(47:21): I don’t think we’re that far off. On the visualization side, and this is an area that we’ve invested in with our maps product. I do think there’s still a lot more to be done. I still see portals or repositories that just look like they were written in someone’s bedroom. 

They just haven’t evolved. And so I do think that clients are going to need better than that. One of the things we have with our product is you can visualize the entities in a value chain around a business and you can explore research by looking at the different entities visually. And so this has obviously taken us some time to develop, but I think it’s surprising how few firms actually have this. I do think in other industries that’s a lot more advanced. 

So I do think the financial services industry in particular lags a little bit behind there, but I do think that that is going to be something we’re going to need to see more and more of. So in terms of crystal ball gazing, I think certainly integration of research into client’s platforms, absolute must and they want it, and in fact, I think they want it now. They’re ready. And secondly, I do think that just easier ways to see the research visually is going to be something that we’re going to have to do more and more.

Catherine (48:44): Thank you very much. Unfortunately, that’s all the time that we have today. So I’d like to say a huge thank you to you three for taking the time to talk to me, share your experiences and insights. And thank you to all our listeners listening to this episode of The Signal presented to you by Third Bridge, the world’s leading investment research provider. Join us for the next episode. And in the meantime, please rate review and subscribe to this podcast. Indeed, if you like it, tell a friend. Find us on Spotify, Apple, and wherever else you get your podcast from. Plus, of course, 

From me, Catherine Ford. That’s goodbye and thank you very much.

Episode Guests

Mike Carrodus

CEO and founder of Substantive Research

Joshua Maxey

Third Bridge’s co-founder and head of corporate development and communications