US asset managers shake up equity research as banks cut back
NEW YORK: As new rules spur Wall Street banks to further shrink their research budgets, US asset management firms are shoring up in-house research, and reinventing the stockpicking business in the process.
Fund managers are eschewing the traditional model of teams built to cover a broad range of industries, instead picking areas of expertise and hiring analysts with very specialized knowledge and often non-Wall Street backgrounds.
The European Union’s MiFID II regulations that target conflicts of interest and took effect in January require asset managers to separately report trading commissions and investment-research payments. In the past, banks bundled research with trading fees covered by investors rather than fund management firms.
While the rules apply only to those operating in the EU, the transparency is making fund managers globally re-think what research they are willing to pay for.
Interviews with more than a dozen senior executives, research analysts and other staff show fund managers are already weaning themselves off routine analysis of major sectors where it is difficult for any investor to gain a lasting advantage.
Instead, fund companies would rather go it alone and focus on narrow slices of the market they can dominate, from breakout technologies like cryptocurrencies, niche international markets and environmental, social and corporate governance. That means fund managers are hiring, but not necessarily those who have spent their careers with brokers or banks.
For example, ARK Investment Management LLC recruited James Wang to cover artificial intelligence (AI) and “the next wave of the internet.” Wang was previously a product manager at Nvidia Corp in California and helped the semiconductor company launch GeForce Experience, a gaming application.
“I never thought I would work in finance, much less on the East Coast,” said Wang, who turned 34 in October.
ARK is now hiring a specialist focused on cryptocurrencies and another researching genomics.
BlackRock Inc chief executive Larry Fink, who runs the world’s largest asset manager, told Reuters he is spending more on research done at his own firm. In recent weeks, BlackRock, which has US$6 trillion in assets under management, asked several providers to stop sending research they were not paying for so the company could make sure it complied with the new rules, according to a person familiar with the matter.
Fink said in October that BlackRock would consider paying out-of-pocket for the research the asset manager consumes from banks globally. Other managers are going further.
Richard Bernstein went “cold turkey,” stopping paying for external research and cutting all of his fund company’s subscriptions to investment-bank research about a year ago.
What he found was that he could live without most of it. “That was the way we could decide who we need and who do we miss,” said Bernstein, who was an analyst at Bank of America Corp’s Merrill Lynch unit before he started his current company, Richard Bernstein Advisors LLC. — Reuters