Buy-Side Firms Prefer Their Own Research After Reg FD

US institutional portfolio managers and buy-side analysts believe the availability and value of sell-side research has decreased in the wake of the Securities and Exchange Commission’s Regulation Fair Disclosure (Reg FD), which requires that all investors receive equal access to research, according to a white paper released earlier this month by Greenwich Associates. As a result, buy-side analysts are getting better access to corporate management and buy-side firms are placing a higher value on their own research.

The report, titled Attitudes Sour As Dust Settles on Reg FD, finds that more than half of the portfolio managers and equity analysts interviewed think that Reg FD, which was enacted in 2000, increased market volatility and lessened the value of broker research. Before Reg FD, sell-side analysts had much more access to corporate management than buy-side researchers, making their research more valuable. The value of sell-side research has been further damaged by the conflicts of interest between a brokerage firm’s research department and its investment banking operations, the report says.

"Institutions now view sell-side firms as providers of raw materials, which require fine-tuning," says Melissa De Vries, a Greenwich Associates analyst and co-author of the report.

According to the report, many investment professionals initially thought the new regulation was decreasing the flow of information. Recently, however, analysts have become more divided on the subject, with equal numbers agreeing and disagreeing that Reg FD reduced the availability of company research. And portfolio managers actually disagree with that opinion by a margin of three to two.

According to the report, the majority of analysts and portfolio managers agree that Reg FD diminished the value of broker research. Institutional analysts agreed with this by a nearly three to five margin. Among portfolio managers, the margin is slightly more than four to three.

These findings support research that Greenwich conducted in the first half of 2001. The earlier study found that while institutions had lower expectations about Wall Street research, they were increasing their expectations of their own research staff. Greenwich traces this trend to both the controversy surrounding sell-side research and attempts on the buy side to boost their own analysts.

Before Reg FD, buy-side analysts didn’t contact the subject of a research report because they assumed the report covered all the details. Now they are talking to company management more frequently. In 1999 and 2000, institutional analysts contacted companies’ management eight times a year on average, but in 2001 that number climbed to 11. This also indicates that corporate management is more willing to dispense information to large investors, the report says.

Buy-side firms are also spending more on corporate management meetings. After Reg FD, most investors thought that increasing researchers’ access to corporate management would diminish the worth of sell-side analysts and increase institutional analysts’ value. So now institutions are paying more for those meetings than for the analysis that results; buy-side firms now assign 50 percent or more of their research commission dollars for this purpose rather than for investment themes or ideas.

Institutions are also hiring more analysts and paying them more. Research conducted by Greenwich concludes that the average institution increased its in-house analytical staff from 7.6 percent to 8.3 percent, year-over-year. And despite the current economic climate, in-house analyst pay has risen an average of six percent, while other professionals, including portfolio managers and traders, remained the same, the report says.

Greenwich Associates interviewed 294 US institutional equity fund managers and 1,375 US institutional equity analysts about their attitudes about Reg FD and broker research. Portfolio manager interviews were conducted from December 2001 to February 2002, while those of equity analysts were conducted from January to March 2002.