CutterAdvantEdge

Issue 58, May 2008

The Investment Research Process – Time for Automation?

Relative to other investment management functions, the research process has largely been ignored in terms of automation. Research analysts have been fairly content to sift through a huge volume of information to arrive at their investment recommendations.

They are not particularly inclined to give away proprietary secrets by having their process scrutinized by an IT business analyst. And they certainly are not willing to be forced into a standard workflow to accommodate a new system.

However, times are changing and the research analyst is ready to open the door and let some technology in. For a variety of reasons, Cutter is beginning to see a renewed interest in strategic technology associated with the investment research function.

Tools for harnessing more information sources. Have you ever been in a research analyst’s office? Their desks are typically piled high with annual reports, broker research, notes, etc. (A bit of a contrast from the trader’s multi-screen paperless desktop.) In addition to all of this paper, the analyst also receives huge amounts of electronic information – market data feeds, financial databases, broker emails, company announcements, and the like. What’s a bit different now, is that the analyst also has an incredible amount of information available to them on the Web, if they know how to find it. Between news sites, subscriptions, blogs, etc. there is an ever-growing number of information sources available.

There are a number of web search tools focused on the investment management space that go beyond a basic Google search and use sophisticated semantic technologies to seek out meaning in unstructured web content. These vendors pride themselves on their ability to find new information and ideas that bring an edge to a particular analyst.

Another type of application being promoted to help the analyst manage their workflow is the research management system (RMS). These applications assist with managing incoming email and news feeds. They track all types of research information and make it easier for the analyst to find the important content. These tools are primarily being installed at hedge funds, but there is increased interest in them from traditional investment management shops.

Fewer sell-side analysts. We’ve all heard about the decrease in sell-side research budgets associated with regulations requiring the separation of research from investment banking functions. The reality is that the sell-side can no longer afford to subsidize the cost of providing buy-side research and is cutting back on their analyst staff. To the buy-side, this means they must take on the research function themselves or find alternative sources. Again the research management system goes a long way toward managing available content, some even providing links to independent research provider (IRP) networks.

Assessing the value of research. With the increased unbundling of trade execution from research costs, buy-side managers are looking for ways to assess the value of external and internal research. Firms are struggling with defining the appropriate methods for valuation since historically most broker voting has been fairly subjective. Software vendors are offering tools that allow managers to define their evaluation criteria and measure brokers against it. There are also some specialist providers that conduct their own evaluations of third party research and offer related consulting to the buy-side.

A strategic approach for a strategic asset

Many investment management firms have discovered that email folders and shared network drives no longer suffice when it comes to maintaining their proprietary research information. They are looking for a more strategic approach to managing this vital asset. There is no shortage of technology tools to support all or part of the research process, from idea generation to report production to broker evaluation. The agile investment manager will consider how these tools fit strategically into their operation and put them to good use.