For fund managers seeking independent research, a new service from The Bank of New York is like online dating.
Money managers indicate what they look for in a research report-perhaps it's coverage of four specific mid-cap retail clothiers, including forensic accounting, interviews with customers and details that demand shoe-leather reporting, such as whether stores in different parts of the country share similar layouts.
Pre-screened independent research providers (IRPs) feed the system what they've got. One report, about a teen-oriented clothing store with outlets in virtually every mall throughout the Midwest, contains feedback from customers between the ages of 13 and 17 who speak about the apparel they've purchased at that chain and others in the past six months.
"[For IRPs], the conundrum is, How do I get in the right place at the right time,'" said John D. Meserve, chairman of BNY Jaywalk, a subsidiary of The Bank of New York, based in New York.
The new BNY Jaywalk 360 aims to solve the riddle by providing a system that filters each and immediately notifies subscribing money manager customers, electronically or otherwise, with a brief description of reports that include the criteria they have indicated they are interested in.
"We're basically matchmakers," said Nicholas J. Colas, director of research, "The beauty is, it's always a warm lead," he said.
For money managers, the advantage is hot-off-the-press access to reports for tickers they own or have expressed interest in, from a network of 150 IRPs that collectively cover 7,000 companies. BNY Jaywalk vets all of these IRPs to make sure they have no consulting conflicts or ties to investment banks.
For research providers, it's a shortcut that bypasses cold calling to disinterested fund managers and seemingly endless courtships involving free samples and, perhaps, months of legwork that lead nowhere.
For BNY Jaywalk, it's an efficient system that partners its research distribution services with an experienced sales team, and could even direct some sales through its BNY ConvergEx trading platform. Money managers subscribe to the service based on the number of stocks they want to track, users they have and other negotiable details. IRPs fork over a commission on every piece of research they sell.
Services like BNY Jaywalk 360 have become increasingly important in recent years as scrutiny over soft-dollar spending and attention to the conflicts of interest that often curse research produced by investment banks have put a premium on independent reports.
And research doesn't come cheap. In 2004, retail and institutional investors spent $9.31 billion buying research, according to a report published earlier this year by Integrity Research Associates, a consulting and review firm. By 2009, the Darien, Conn.-based company estimates that figure could be as high as $11.9 billion.
And while large fund complexes have-in reaction to calls for unbundling soft-dollar payments and regulations calling for enhanced transparency within trading commissions-beefed up their own internal research teams, firms that have less than $1 billion in assets under management can't afford to.
There has been no shortage of firms hoping to capitalize on the needs of these mid-size companies, either, making research brokers like BNY Jaywalk or New York-based Soleil Securities almost essential.
"There is so much content out there, much of it meaningless and invaluable," said Ken Dengler, chief operating officer at Soleil. "It's like drinking daily from the fire hose," he said. "You still need to get it to the end user in a digestible format, and it has to be value-added."
Like BNY, Soleil sells not only the service of ensuring that reports might be relevant to its customers, but its in-house stamp of approval, attesting to the methodology behind the reports and credibility of the IRP that provided it.
Credibility is crucial, said Michael Mayhew, president of Integrity Research Associates. "Most independent research providers are not regulated," he noted. As a result, although they may be independent of investment banks, "these firms can be conflicted in many ways and not really ever think about it." A broker can require that the IRPs it handles avoid common pitfalls, such as allowing analysts to hold securities or investments related to the products they cover, or employ methodologies riddled with holes.
Colas said that while five years ago, the majority of the demand for independent research came from long-only mutual fund managers, today's most voracious consumers are hedge funds.
The shift in demand may, in part, be a result of the fact that not only do hedge funds have fatter margins, but they also are not as closely regulated, Mayhew said. "In part, mutual fund managers need to understand more about the research, because they have a fiduciary responsibility," he said.
Brokers can also provide information on various IRPs' track records. For example, BNY Jaywalk polls users about how useful they find certain researchers. Furthermore, rather than recommend managers buy, hold or sell, the reports are divided into "positive," "negative" or "neutral."
According to Meserve, 25% of BNY Jaywalk 360 reports are negative, compared to about 6% of sell-side reports on the Street, underscoring the objectivity of IRPs and how they are unfettered by other allegiances. But the true value of the broker is in determining which reports are most likely to be right, based on rankings and reviews from those who have used their products before.
"Contrarian is valuable to a point, but it's only good if it's accurate," Colas said.
Just as mutual fund and hedge fund managers may rely on brokers to find them the reports most relevant to their work, IRPs likewise depend on brokers to help circulate their reports and sell their potentially alpha-generating ideas.
"You have to get in front of the money manager who wants the stuff," said Michael Krause, president of New York-based AltaVista Independent Research, a two-year-old firm focused on covering the rapidly expanding world of exchange-traded funds.
"As a single independent without a great rolodex on Wall Street, it's very hard to get someone to take your calls, let alone to get someone to listen," Krause said. "It's essential to partner."
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