Much of the news around the impact of MiFID II on research has focused contextualising the challenges of unbundling through the lens of the industrys idiosyncratic evolution and how market participants attempt to value services and implement market structures. But looking ahead, how will the research value proposition change over the short to medium term, and what are the products and strategies managers will turn to?
At its core, the raison d’etre of research is to support better investment decisions and improve outcomes. However, many research firms take an economistic or journalistic view when defining value, assuming that if they produce the best content, rational consumers will beat a path to their door.
However, building a better mousetrap is no longer enough (if it ever really was). And innovative providers and ecosystem players now recognise that while content may be king, it has to be accessible, actionable and integrated, to be of superior value. If you do not understand why – take a stroll in the park on a hot summers day and observe the queue of people paying three times the supermarket price for a can of cola from a strategically placed stall.
Driven by the valuation process, the research industry is undergoing a metamorphosis from content-based products, to information/analytics, workflow tools and ultimately a set of tailored solutions.
Research, research everywhere
Do you know how many research emails I receive on a daily basis? Asked the hedge fund manager as he leant back in his chair. Over 500! he responded to his own question.
How do you get through them all and identify the most valuable insights? I queried. I dont. he responded, disappointed I had somehow missed his point.
The fact is, investment professionals do receive a lot of research, but rather than volume being a metric to demonstrate status within some perverse pecking order, it simply compounds a problem that should determine rank – better investment decisions.
How do professionals discover high quality research that is relevant to their investment process? In the past, they have applied heuristics such as following specific authors, scanning subject headers or relying on curation by a salesperson/account manager. But this has always been a flawed process exposed by increasing volumes of content. Now, innovative firms are leveraging behavioural insights and new technology to tackle the issue head on.
Firstly, the research report is changing. Editors, for many reasons – some legitimate and some subversive, have often made reports more difficult to derive insight from, than is necessary. This is changing – for example, with the help of a team of psychologists, UBS has updated the structure of their reports, to improve clarity and accessibility.
Secondly, more research is being delivered in rich multimedia formats. Podcasts, webinars, videos and dedicated mobile content are all on the rise. This supports deeper insights and more efficient multi-tasking.
To support discovery, semantic search algorithms, machine learning and natural language processing have replaced email based heuristics to create personalised, curated feeds of contextualised research insights (trying saying that after a few beers), applying Google-like search to the vast body of research content.
Now, as a Portfolio Manager disembarks from a flight to Hong Kong, a research provider sends her an automated alert with a view on China and the most recent report on the Chinese Tech Sector.
The move from push to pull will continue to improve over time, as search algorithms learn more about individual consumption habits and trends. The challenge will then transition from uncovering signals, to eliminating filter bubbles and confirmation biases.
Creative destruction
One of the overlooked facts of investment research is that it does not have one, but many use cases. The primary function of the industry is to support better investment decision-making, but it does this in many ways – recommending trades, identifying and forecasting themes, charts and data modelling and facilitating interaction and debate.
At present, the onus falls on the consumer to unpack the report (or meeting) to extract value. But with the use of semantic technology that deconstructs and structures qualitative content, we have begun to not just unbundle research from execution, but unpack research into smaller, more usable atomic elements. Themes, views, charts, data trade ideas, events, narrative and portfolios are now extracted from the traditional report and reconstituted to be used in creative ways to support the investment process.
Maybe you are looking for themes impacting China, or high conviction views, or datasets that lead CPI. These can now be discovered independently from the report and used to support specific use cases – creating investor presentations, developing a thematic recommendation or scoring asset classes or sectors.
I like the way you work it
Two of the biggest shortcomings of research have been the lack of interactivity and availability of tools to integrate insights into the investment value chain. While part of the interactivity issue is addressed through analyst access or custom projects, it does not meet all needs (and has limited scalability). And the integration of research into workflow has been a problem largely avoided, or left to the consumer to solve.
A good example that demonstrates both issues is the Analyst who wants to use a chart from a two-month old report in a presentation – updating the timeframe and adding a dataset. To achieve this, he would most likely have to recreate the chart from scratch in a separate application.
This is one example of many – tracking/updating research views and comparing them into portfolio weights, summarising research, creating investor presentations and using content to train junior staff.
To bring research to life, innovative research providers are leveraging concepts such as design-thinking to better understand and deliver tools that help solve real problems (and create more stickiness).
This demand also explains why research aggregators in their current form are unlikely to gain significant traction -they solve a first order problem – the need to manage and access available content. Portfolio Managers are not looking to solve a document management (or really, a search) problem – they are looking to solve an investment and workflow one.
Beyonc in your back garden
As managers pay closer attention to the research they are purchasing, they are also altering their expectations of the type of research they are willing to pay for – demanding services that are closely aligned to their specific needs.
This is increasing demand for bespoke and custom projects, portfolio construction and outsourced services. Transforming many client-vendor relationships into deeper consultative partnerships and moving away from arms-length subscriptions to integral solutions.
This poses a challenge to some firms that operate on publisher exempt rules, restricting the production of bespoke ideas. But given the expected rise in demand (and potential dollar value) for The McKinsey of Investment Research, expect this problem to be solved in short order.
What can I help you with?
The real economy is currently in the midst of the third, or fourth (I lose count) post-industrial transformation. Artificial Intelligence, big data algorithms, machine learning and robotics are laying waste to broad sections of previously untouched jobs and functions, while creating new ones.
Information industries are not immune to these changes. For example, the legal industry is currently in the process of being find and replaced by algorithms for all but the most complex task. Within the investment management industry, fund flow to passive and smart beta solutions (powered by robo-advisors and algos) has driven down margins over the past few years.
Within the research paradigm, these forces are also reshaping value propositions. Big data modelling and predictive analytics are informing more trades than ever before, and it would be a fool who bets against the Research Virtual Assistant being part and parcel of the Portfolio Managers workflow in the not too distant future.
Stronger together
Research is not an island. It benefits from, and enriches a broader base of content, tools and activities that make up the investment value chain. But for far too long research has been isolated. Firstly, on a provider-by-provider basis and secondly, from other aspects of the investment process.
This is changing fast. Starting with API feeds of analytics into downstream systems and models and research aggregation platforms, research offerings are coming together and no longer dancing alone in the corner to their own music.
This process will continue – direct integration of research insights into investment risk and portfolio management systems, combined research and payment management systems and integrated research and wealth management/trading tools are all becoming part of a single ecosystem.
If you were to focus on press coverage of MiFID II, you would be forgiven for questioning who would be a Research Analyst today. But in reality, the future of research is bright. The value proposition is undergoing an exciting transformation. Better research. Better integrated. Supporting better investment decisions and better performance. The new research industry is more win-win than winner takes all.
This transformation is technology-enabled, but human led. The core skillset of the Research Analyst changing. Executives running research operations are thinking about their product as more than just content, employing dedicated product managers, spending time with users and thinking about workflow as much as they think about analysing the markets.
The new research industry is a more complex, integrated species. To solve the last mile problem, providers must be prepared to not just improve stamina and speed, but to run a different race.
Brijesh Malkan is Product & Innovation Consultant atBCA Research,
