New York, NY – Recently, the team at Integrity Research Associates conducted a survey of buy-side analysts to determine what factors were the most important drivers in the selection of external research providers (produced by sell-side and alternative research firms). Based on this survey, the buy-side explained that the credibility of the research provider is the most important factor in selecting external research providers – even more important than unique industry or company insights.
Survey Results
The survey of 50 hedge funds and mutual funds conducted in the late spring and early summer of 2007 revealed that buy-side analysts ranked the "Credibility of the Research Provider" as the most important out of eight factors in selecting external research, generating an average rank of 4.56 out of 5. Analysts at both Hedge Funds and Mutual Funds agreed that firm credibility was the most important selection criteria in choosing sell-side or alternative research.
Factors in Choosing External Research Providers
|
|
TOTAL |
HEDGE FUND |
MUTUAL FUND
|
|
Credibility of research provider |
4.56 |
4.67 |
4.50 |
|
Unique company insights |
3.92 |
4.10 |
3.90 |
|
Depth of research |
3.90 |
4.10 |
3.75 |
|
Unique industry insights |
3.86 |
4.10 |
3.75 |
|
Credibility of analyst |
3.86 |
3.62 |
4.20 |
|
Transparency of research |
3.78 |
3.90 |
3.75 |
|
Access to analysts |
3.26 |
2.95 |
3.45 |
|
Performance of recommendations |
2.96 |
2.76 |
3.25 |
On an overall basis, "Unique Company Insights" ranked second in this survey out of eight factors, posting an average score of 3.92 out of 5. Analysts at Hedge Funds felt that "Unique Company Insights", "Unique Industry Insights", and "Depth of Research" were deemed to be equally important in the external research selection process. Mutual fund analysts, on the other hand, felt that "Credibility of the Analyst" was slightly more important than company insights.
In total, the buy-side analysts we surveyed felt that the third most important factor in selecting external research was the "Depth of the Research", posting an average ranking of 3.90 out of 5. However, hedge funds ranked "Transparency of Research" next, whereas mutual fund analysts thought "Unique Company Insights" ranked third.
While these factors were seen as the most important in selecting external research, it was not surprising that the quantitative performance of a firm's research calls was relatively unimportant in the selection process of an external research provider. In fact, in our survey of buy-side analysts, "Performance of Recommendations" ranked last, with a score of 2.96 out of 5.
Some Surprises in these Results
On the one hand, it is easy to understand how brand name and reputation are extremely important to buy-side analysts when selecting external research sources. However, it seems a little strange that analysts are more influenced by firm credibility than by other factors that represent the quality of research like company / industry insight, or the depth and comprehensiveness of the research.
In fact, this trend was even more pronounced when evaluating the results of mutual fund analysts who ranked firm and analyst credibility as their top two factors in selecting external research. As a result, we suspect that well-known and respected research providers will be at the top of most analysts lists when they choose sell-side or alternative research, whereas small, lesser known boutiques will find it more difficult to gain mind share with many of these analysts.
One unexpected factor that was highly rated in our recent survey was the importance of "research depth". The explosion of sell-side and alternative research providers in recent years has led, in many instances, to a cry for brevity and concise research from many clients who have become so inundated with research that they cannot keep up. However, it is understandable why full-time analysts might judge a research firm's value by the depth and comprehensive nature of the research they produce.
In countless surveys in recent years, the buy-side has rated access to analysts as one of the most valuable parts of external research. Consequently, it was somewhat surprising that buy-side analysts ranked "Access to Analysts" seventh out of eight, with a score of 3.26 out of 5. Perhaps this is because buy-side analysts expect this from their suppliers, and therefore it is not a real differentiator when selecting third-party research providers.
It is important to note that many alternative research providers do not aggressively market analyst access. This is due to two factors. First, many of these firms generally perceive that the primary value of their offering is their research reports. In addition, many of these firms do not have sufficient analytical resources to be able to spend significant amounts of time interacting directly with clients.
However, various studies have shown that the value of sell-side or independent research firms' research reports has become less important to most buy-side clients than access to company management, or access to the analysts themselves. In fact, numerous industry executives are starting to agree that traditionally company research reports are merely "advertising" for the company knowledge and industry expertise of the research analyst.
