The buy-side’s demand for fixed-income research, and its willingness to pay for it, has increased dramatically over the past two years, notes a recently published research report from industry analysis firm Greenwich Associates.
The importance of research is a key component of dealer selection in other asset classes, like cash equities, where 60% of total commission spend is allocated to compensate brokers for research and advisory services, according to Kevin McPartland, head of research for market structure and technology at Greenwich Associates and author of the report.
“Good, actionable research matters more than it ever has, and the sell side knows it,” he said. “The dealers have been forced to tier clients more now than ever given the business environment, and so only the top-tier clients are getting access to the top-tier research.”
Of the 1,067 US-based institutional investors active in the fixed-income market surveyed for this report, more than half, 54%, stated that that they reward dealers for research. This is nearly double the 28% of respondents Greenwich Associates polled in 2012.
Dealers would be wise to invest in their research and high-touch offerings as long as the fixed-income market remains relatively illiquid.
“In the past, dealers were able to keep clients happy through primary offering allocations, committing capital in the secondary market and aggressive pricing across the board,” said McPartland. “Today none of those actions is easy nor a given.”
The dealer services that have seen the great growth in value for the buy-side over the last year has been investment strategies, market commentary and trade ideas from analysis as well as analysis calls or visits. Both categories witnessed an 11% growth from 2013. The former set of services have a 55% of the respondents cited the trading strategy related offerings as a valued services while 27% of them said it was the one-on-one interaction with the analysts that they valued most.
The only offerings that lost some of the buy-side’s interest were published, macroeconomic, sector and issue-specific research. Although 46% of the respondents stated that they value the service, a drop of 10% from 2013.
Such results do not come as a surprise to McPartland. “The Federal Reserve’s intentions are clearer today than they have been over the past few years,” he said. “The taper is moving along as expected and the economy is improving. Now clients are focused on finding a good trade idea in an environment with no yield, no volatility in a stock and bond markets that are overvalued.”