Apple and Amazon have become trillion-dollar companies. S&P 500 is riding the bull into the rainbow. This will lead to many articles stating stuff like if only one had invested in Apple 20 years ago. That’s where good investment research comes in!
Bull markets, like right now, have a way of creating excesses through overvaluation that can easily be overlooked. While the market cyclicality is a self-perpetuating truth, their effect on research evaluation can be huge. One must consciously and deliberately pursue a disciplined approach. Bull markets, as right now, over-emphasise on “hot-markets” like the tech companies in the 90s, leading to over-allocation.
Equity research is continuously evolving to take benefits of the swings in market conditions and taking expert third party research is a leap in that direction. In an institutional setting, MiFID II calls for unbundling of research and execution services. In our opinion, this model of fee-based research brings in much needed accountability and transparency.
Research can help you identify the underlying patterns in the investment markets. A good research analyst will provide you an objective, accurate and independent analysis. Carries out systematic and reliable procedures to ensure that the research represents reality. Works in tandem with you, the investor or the investment manager, so that your investment strategy is well understood and translated into research objectives.
Research can also help in steering through specific investment styles such as value, volatility, momentum, or quality. In such investment styles, scope creep can occur between the investment styles and the investment objectives, i.e. achieve better risk adjusted returns. External research aligned to your investment thesis can help in bridging the gap and mitigating the risks of scope creep.
Data speaks the truth. It is the research provider’s responsibility to find, collate, churn and understand a wide variety of data to substantiate the recommendation itself. There is healthy evidence that good investment research banks itself on qualitative as well as quantitative analysis. Such in-depth and rigorous analysis can help you spot smart-betas and alphas in the market.
Good investment research helps the investors/managers to add value to their portfolios.
The changes in the investment environment and regulations are pushing for a robust and results driven research. However, the pricing structure for such fee-based research is still in its infancy. Some big banks are offering access to corporate research portals at throw-away prices, in a bid to essentially wipe out the boutique independent researchers. This could lead to further price wars, certainly an unintended consequence of MiFID II.
Monitoring the research recommendations is vital to establishing its value. While the absolute performance of the recommendations is a good indicator, relative comparison against similar coverage research and market indices will provide good insight into the value of the research.
Be that may, the analysis that substantiates the recommendation is as important as the recommendation itself when it comes to fundamental research (look out for our next blog on this topic!). Hence the evaluation of the research should also factor-in the strength of the analysis perceived by the research consumers.
While designing Invisage (previously Parity One), we kept the research provider at the center of our design approach. Most of our research provider clients wanted a system that can independently, objectively and continuously capture the performance of research. That’s exactly what we have done. We built Invisage platform that can extract absolutely everything that research can offer and showcase. Be it the market impact on the recommendations or the qualitative analysis.
The research benchmarks built on Invisage for each provider can be used to track the performance of recommendations and compare them amongst providers and against market indices.
MiFID II guidelines specify that research must be paid for – but how much? we believe a thorough performance analysis can lead to more efficient pricing, and hence a more justifiable and balanced approach for research consumption into investment portfolios. Both research providers and consumers can not only monitor the research performance on Invisage but collaborate on investment ideas and do much more. It essentially pushes the research right into the end investment portfolios and brings both parties much closer to each other.
You can create a research benchmark and start tracking it within minutes. Curious to see Invisage platform in action? Book your free trial today.
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A datapoint that has been doing the rounds recently is that “$1.3bn was spent by investment management firms on alt data in 2020 and the market is expected to grow by 30% annually for next 5 years.”
2020 was the year ESG went mainstream. The confluence of a build-up in asset owner pressure, regulatory changes and the pandemic caused a rise in both operational and investment spending on ESG by investment managers.
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