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Sell side rises to challengeThe Enhanced Analytics Initiative’s money – and publicity – is helping to improve the quality of non-financial research, says Philippe LespinardOn 6 June, the members of the Enhanced Analytics Initiative (EAI) convened in Paris to announce the results of the second six-monthly evaluation of extra-financial research. The summit highlighted the momentum that the EAI is gaining in encouraging brokers to analyse extra-financial issues (EFIs) in their equity and debt market research.
The EAI was formed last year by a group of pension funds and fund managers (see box) to promote better research from sell-side analysts. Every six months, a detailed evaluation is carried out of both the quality and coverage of sell-side research output. The evaluation, by Zurich-based specialist consultancy onValues, serves as the basis for EAI members' allocation of a minimum of 5% of their respective brokerage commissions – totalling €4 million ($4.8 million) for the second half of 2005 – to those research houses which are most effective at analysing material EFIs and intangibles. It also provides a platform to "name and acclaim" the best research providers. The evaluations scrutinised 23 research providers in detail, of which four institutions were singled out for research produced in the period covered by the study (November 2004–April 2005). These were Bernstein Research, CM-CIC Securities, Dresdner Kleinwort Wasserstein and UBS Investment Research. Deutsche Bank and Goldman Sachs were also commended. Five criteria were used for the evaluation: - the scope of extra-financial issues covered; - overall presentation and originality; - the investment relevance of sector and issue analysis, including quantitative modelling of sector impacts, and long- and short-term analysis; - comparative company analysis, including analysis of EFI impacts on company-specific investment value drivers, and integration into stock valuations and recommendations; and - coverage of the research universe. According to onValues,“the overall impression received from the present evaluation is that the market is currently in a phase of testing and experimenting with different ways to approach extra-financial issues and integrate them in financial research. It is not yet a time of major breakthroughs, but of small, discrete steps forward.” The onValues report notes that, given the short time since the last assessment, carried out at the end of last year, it is difficult to identify clear trends. There has, however, been a significant increase in the amount of EFI research produced since the inception of EAI, with 84 reports produced by 23 research providers being included in the second assessment. This corresponds to an almost four-fold increase in the number of reports produced. Issues such as corporate governance, mergers and acquisitions, and business ethics are becoming better covered, but the research is still somewhat skewed to certain sectors, such as utilities, and issues such as climate change. Indeed, the onValues report goes so far as to say that climate change and emissions trading is “almost over-researched”. The focus is also almost exclusively on equity research, with only one report dedicated to credit. A positive development is the fact that EFIs are becoming an increasing element of ‘mainstream’ reports. Equally, institutions are starting to integrate EFIs into long-term research products. Also noticeable is the fact that independent and non-affiliated research providers are including extra-financial research as an important differentiation factor and are therefore challenging global sell-side institutions. Research providers are responding in different ways to the challenge to develop new intellectual capital. Several brokers – including Citigroup, UBS and CM-CIC – have recruited staff and are building their in-house research capability. Others are pairing with specialist socially responsible investment rating agencies or think-tanks. For example WestLB uses the SiRi group, while UBS and others are buying Innovest research. OnValues also found that North American research providers are gearing up to the EFI challenge, with 40% of reports produced by firms with US headquarters. Small, independent providers are also producing high-quality research, earning average quality scores of 44%, compared to 38% for other providers. Progress has certainly been made since the last evaluation in January 2005, but the outcome that we really require is consistently good quality research across a range of sectors and issues that is directly applicable at company level. This is still some way off but we are confident that the increasing membership of the EAI and the increased incentives that this entails will help research houses to deliver the breakthrough that long-term asset owners and their fund managers require. The recent announcements by the UK’s Hermes Pensions Management and Netherlands-based SPF Beheer that they have joined EAI is a testimony to the growing interest of investors in this type of research. As more asset owners and managers join the initiative, the signal sent to the sell side will increase, with a commensurate increase in the quality and quantity of EFI analysis. Philippe Lespinard is chief investment officer of BNP Paribas Asset Management, and is the chairman of the EAI. E-mail: philippe.lespinard@bnpparibas.com For more information about the EAI, please e-mail claire.maloney@capitalmsl.com or visit www.enhanced-analytics.com
BOX 1 MEMBERS OF THE ENHANCED ANALYTICS INITIATIVE |
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