Author: Maha Khan Phillips
Joshua Maxey, CFA, is Co-Founder and Head of Corporate Development at Third Bridge, a global provider of independent investment research. He talks to Professional Investor about the rapidly changing world of investment research.
How has the world of research changed since Third Bridge was founded in 2007?
Today’s investment research industry is radically different to the one some of us knew 16 years ago - and it is still in a state of flux. The first decade of the post-Eliot Spitzer era dominated factors in research models. This is where the concept of primary research really started to emerge. More recently, MiFID II has been a driver of change as has the emergence of alternative data. As a result, there has been a steady decline in sell-side research, and we’ve seen that in headcount numbers - which are down by over a third. The quality of research has degraded on the traditional banking side, and that is one of the issues that the buy-side is having to deal with.
Another trend is the difference between long-only traditional buy-side managers and the hedge fund world. A lot of talent has left the industry to set up their own boutique businesses. There are a lot of interesting highly specialised research boutiques emerging, but the challenge is that they lack scale and don’t have strong distribution. That’s why you’ve seen firms like Autonomous being bought by larger players and folded into their own research teams. We’ll see more of this consolidation over the coming years.
The other trend we’ve seen is that lockdowns drove a spike of interest in investment blogs, analysts on social media, and financial podcasts. For example, if you look at Substack, there are some incredibly talented analysts creating a following of both retail and institutional investors.
The asset shift towards private market investing is something that cannot be ignored either, and that has had a real impact on the research landscape. It’s fascinating to see how growth in our industry has been driven by alternative asset investing and private market investing. It has certainly stimulated growth for vendors who are able to provide research on private companies. From my vantage point, this has been a huge boost for our industry and I’m quite excited about the future because these are asset classes which have historically been underserved.
How will research continue to evolve in a post-MiFID II world?
Research has come under pressure. The budgets of traditional sell-side research businesses are down by a third since MiFID II, yet at the same time, primary research spend has nearly doubled and is now a $2 billion market. The buy-side increasingly wants to do its own research, and they want to speak to people who are operationally involved on the ground, and who are unbiased.
The whole concept of investment research is becoming less elitist and much more democratised. We saw this with the Robinhood platform, for example.
How do you see Third Bridge positioned in the market?
We see ourselves as the premium global provider in the investment research marketplace. We are focused on having coverage across all three major continents that our clients are involved in. We believe search and discoverability will become a much bigger factor for clients, and getting relevant content in a timely manner will be critical. We have already seen this playing out in the alternative space.
We believe that human experience and knowledge drive better investment decisions, and we have taken this concept of human insights and used it to build a huge network and archive of expertise. Our analysts are unencumbered by potential conflicts of interest. They focus not on financial reporting and quarterly announcements but on business models, themes, operational insights and management. They find experts who can describe the competitive environment, give market context, and the outlook for analysed companies. We believe it is the nuance and subtlety of unique human experiences and interactions that give us an edge.
In a world where the rise of data is exponential, how can fund managers and institutional investors filter out the ‘noise’?
Aggregators will play a part here in filtering through the noise. This brings challenges however, especially as research firms want to retain a direct relationship with clients. The trend for buy-side firms building internal research capabilities will continue. Many of our larger clients are establishing data teams and in-house aggregation models to triage information more effectively.
Part of the challenge in terms of research providers is that everyone has their own portal, and if you speak to the buy-side, they’ll tell you that they have a hundred portals to stay on top of. Clients want research providers to be much more embedded into their own workflows and needs. The winners in investment research will be the ones that can provide insightful, unbiased, relevant and timely research in ways that are very low friction. For example, we’ve just updated the UX of our interview archive and usage frequency shot up by 28%. The content is the same but accessibility really matters.
What keeps you up at night?
Apart from the geopolitical uncertainty, I think about whether this is a fundamental ten-year-plus change that we are going through or a milder correction. We have seen turbulence in markets in the past and people will tell you that this time it’s different. I’m concerned because we have inflation to contend with on the back of an unprecedented pandemic. We’ve used monetary stimulus to prop a lot of economies up, and if that has run its course then will it now require a prolonged depression for ten years, or is it a correction that will turn around relatively quickly? I’m an optimist and I do think we should see things improve in the second half of this year but, of course, we could do without any more black swan-type events.
Joshua Maxey, CFA, is Co-Founder and Head of Corporate Development at Third Bridge