Previously home to more rudimentary back-office functions like customer call centers and payroll services, emerging market countries like India and China are playing a greater role on the research side of the money management business.

A number of factors in the U.S. have been driving this recent trend, experts say. Among them are competitive pressures, as the fee war compels mutual fund firms to find business areas where they can save a few bucks; and a stricter regulatory environment, where soft-dollar rules have put the pinch on the free research brokers would kick back to fund firms in exchange for trades.

Concurrently, a number of factors overseas have been contributing to the trend. That labor costs in India, for instance, remain about half of what they are in the U.S., is a prevailing factor. Financial services firms have saved $3.3 billion over the last four years by offshoring to India alone. The maturing skill levels of Indian workers - two million English-speakers graduate annually - also makes it an increasingly viable destination for more complex tasks. Cost savings also tend to be greater when the task is higher on the value chain, experts say.

And due to the growing number of U.S. companies with large stakes in its biggest banks, China is now the third-most popular offshoring destination for financial services firms. Furthermore, as money managers continue to favor emerging markets, many firms are finding it more useful to take advantage of native expertise rather than to cover a region remotely.

But ironically, more third-party service providers in India and China are offering U.S. financial services firms coverage of domestic and European companies.

"On the investment banking side, research has gone from an experiment to mainstream," said Peter Lowes, a partner with consultant Deloitte & Touche and leader of its outsourcing advisory services practice in New York. "A big fund company hasn't set up a site offshore yet, but it could easily happen within the next year."

There's bias among investment bankers to establishing a captive site with local talent, and primarily in Mumbai, India's investment banking capital. But there is no bias toward the regions they cover, Lowes said.

"They are covering major markets, primary issuers in major markets," he said.

Alok Aggarwal, chairman of Evalueserve, a Saratoga, Calif.-based third-party service provider with more than 850 researchers at sites in Gurgaon, India, and Shanghai, China, counts two large U.S. fund companies among its 80 clients. Aggarwal wouldn't name them, but he said that roughly 75% to 80% of the research his analysts conduct are on U.S. companies.

Most of the work is centered on creating models that examine a company's returns on capital investment, for example, or comparative analysis models between companies or financial markets. Evalueserve researchers might also conduct much simpler tasks, such as compiling regional newspaper clippings on a particular company. But in the end, Aggarwal said, most of the work his researchers conduct could be performed by a U.S. worker with an associate's-level college degree.

"We do the grunt work," he said, adding that his researchers do not write reports, interview corporate executives, or make recommendations on whether to buy or sell a stock. "That's for the senior analyst in New York or London. They know Wall Street. That's not our goal."

Either way, business is booming. Revenue from financial services firms now accounts for 35% of Evalueserve's business. Deals range from $10,000 to $500,000 each, and the firm charges $20 to $45 an hour for its people.

"We're doing very well," said Aggarwal, an engineer with a Ph.D. in computer science from Johns Hopkins University and a longtime research manager at IBM in India, who co-founded Evalueserve five years ago. "People are discovering that by using Evalueserve, their senior analyst can cover more companies."

New York-based 3iAnalysis is also providing U.S. funds with domestic and emerging market research from abroad. Company founder and president Ashish Mittal also wouldn't name the fund companies, but he said the information his analysts provide is becoming more and more sophisticated. All of Mittal's analysts hold the equivalent of an MBA, CFA or CPA from leading Indian business schools. And while their particular tasks are tailored to fit a client's needs, work could include participating in earnings calls, maintaining contact with management at covered companies, reviewing press releases and other material documents, and developing investment theses.

The firm can also provide research on M&A opportunities, and with the 10-hour time difference between New York and its offshore location in New Delhi, it can also provide next-day earnings reports analysis.

"Or the client might want us to look at publicly available information, like news, and we'll shoot them quick notes. If they want us to pursue the topic further, we can," said Mittal, a Columbia University MBA and the former CIO for a unit of Thomson Financial. "Or they might say, Great, you've found an interesting company. We'll take it over, and you go back and work on these other 200 companies.'"

While 3iAnalysis can deliver services at a savings upwards of 70%, Mittal said his firm is more focused on providing revenue and return opportunities.

"The reason firms are going offshore is for the cost advantage, but we try to focus on where we can add value, versus saying, Whatever you do, we can do it for less,'" he said. "For instance, an analyst can only cover 10 to 15 companies. We can bring that up to 20. Also, there's the opportunity for them to cover the bigger companies more closely, while we cover the smaller ones. And in these emerging markets, we can be their eyes and ears on the ground, talking to company management."

But, experts say, there is an element of risk.

"The number one risk, especially in India right now, is intellectual property leakage through employee turnover, especially in research," said Mark Peacock, a principal at Archstone Consulting, a Stamford, Conn.-based firm that annually examines offshoring trends with Duke University.

"It's boom-time in Bangalore, not unlike the tech boom of Silicon Valley in the 1990s," he added. "Every day, an employee walks out the door with company knowledge, and every day, you fight harder to get them back. They've got the knowledge, and they can easily take it to another company."

The attrition dilemma - a recent study from Deutsche Bank estimates that call center turnover rates in India exceed 50% annually and among IT engineers it's 15% to 30% annually, while salaries are growing by upwards of 15% annually - also poses an efficiency risk. For every employee that jumps ship, Peacock warned, another less qualified individual must be spun forward.

It's unclear to what extent the nation's leading fund firms are embracing offshore research. Officials at Boston-based Fidelity Investments, which just added about 50 analysts in Boston and is seeking more, said most of its research is conducted in-house.

"We have a significant research team here," said company spokesman Vin Loporchio. "Although we do use some third-party research, we wouldn't normally discuss where we obtain that research."

Another Boston shop, MFS Investments, relies on some outside research, said spokesman John Reilly, but "we're a company that's grounded in research, so we do most of it in-house." Reilly would not comment on where MFS obtains its third-party research. Putnam Investments in Boston did not return calls prior to deadline.

Janus Capital spokeswoman Shelley Peterson said the Denver firm conducts all of its research in-house. "Research is what we feel we do better than anyone else," she said. "We feel it's our core competency, and we feel it provides us with our competitive edge."

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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