Asset managers intend to cut their analyst research budgets by 30 per cent, heaping more pain on the investment banking industry that has already been forced to make thousands of people redundant on the back of falling profitability.
The sharp reduction in how much fund houses are willing to pay for research will be felt most strongly in Europe, where asset managers plan to halve how much they spend on sellside research, according to a poll of 30 global asset management companies and six investment banks.
The cuts to research budgets, which are estimated to be worth $15bn a year, will trigger further job cuts for analysts and the potential elimination of entire research divisions, according to banking and investment experts.
The cuts are creating seismic changes for investment banks, which are having to reshape their operations.
Benjamin Quinlan, chief executive of Quinlan & Associates, the consultancy that carried out the survey, and former head of Asia-Pacific equities strategy at Deutsche Bank, said: “So much research is redundant or unused.
“The buyside does not need 30 brokers to give them the same report.
“Job cuts [among bank analysts] are happening, but not at the pace or speed that it needs to. There is no doubt [banks] will have to reduce costs further. Lesser-rated analysts will be on their way out.”
A separate poll of 2,200 asset management companies carried out last month by BCA Research, an independent research provider, found the number of analyst reports being produced will fall by a fifth, leading to a significant reduction in headcount within banks’ research teams.
Brijesh Malkan, a former Legal & General fund manager and a director at BCA Research, estimates the average portfolio manager receives 500 analyst reports a day. He said: “Eliminating information overload is probably the biggest thing asset managers are looking for.
“Asset managers were receiving 200 pieces of content on Facebook on a weekly basis. That has already halved over the past three months. If you are the 20th-rated analyst on Goldman Sachs’s telecommunications team, you probably need to be looking for a job pretty quickly.”
The drop in asset managers’ research budgets has been driven by new European rules that have forced fund companies to provide a clear budget for research costs to their investors. Previously asset managers paid for research as part of a bundled mix of services that included payments for equity or fixed income trading.
The new regulatory regime has made investment groups question how much research from analysts or brokers is truly worth.
A senior executive at one of Europe’s biggest fund houses, speaking on condition of anonymity, said the company has already reduced how much it spends on research. “The likelihood of asset managers paying less for research from sellside analysts is high, especially in Europe. Paying less has already been happening, at least for the for bigger, global players with more purchasing power,” he said.
Other large fund companies are turning to high-quality independent research providers, or doing more research in-house, rather than relying on bank analysis that comes with unclear pricing policies.
Banks have already started to change their business models in response to these changes, but many still support armies of analysts. Banking stocks are currently covered by 465 teams of bank researchers, while telecoms and IT are covered by 283 teams, according to Extel, the data provider.
These pressures have prompted some analysts to move from banking into asset management, according to recruiters and industry insiders.
This followed Alberto Gallo’s departure from the Royal Bank of Scotland, where he was a macro credit strategist, and Gavin Phillips’ decision to leave Jefferies, where he was head of sales trading. Both joined New York-based hedge fund companies earlier this year.
An asset management researcher, who last year worked as a banking analyst, said the drop in research spending by fund companies has generated considerable “nervousness” in investment banks’ research teams.
He added: “There is definitely pressure on the sellside. We are having more meetings with [banking analysts] around how much we want to pay; those conversations will be happening across the industry. There is definitely a squeeze.”