Fundamental company analysis1 requires diverse sources of research. Some of this is generated internally by our investment team, but we also rely on external research providers who have expertise in specific areas and provide diversity of opinion.
Historically, the cost of external research was bundled with the cost of execution paid to brokers for buying or selling shares in the stock market. As a result, the client bore the cost, paying a full service commission rate.
Unbundling is the process by which a firm separates its execution commissions from its research spend. Unbundling should remove the risk of any conflict of interest and provide increased transparency for clients.
Following the establishment of Stewart Investors on 1 July 2015 we decided not only to unbundle our research spend, but also to pay for it directly ourselves from our own Profit & Loss (P&L) account. As a result, the cost of execution commission for clients has roughly halved. In addition, there should be visibility going forward on how much we pay for research and the sources of that research.
After unbundling, there are now four components to the management of our external research:
1. Core Research
2. Bespoke Research
3. Company Relationship Team
4. Research Tender Process
We continue to use research provided by a core group of research providers/partners, paying a retainer fee for a package which includes basic research, access to analysts and company management visits. The retainer fee and those brokers used for core research are reviewed by the Research Committee.
We employ specific research providers/partners on an ad hoc basis to carry out individual pieces of research as required by the investment team which have not been provided as part of core research. These items of research are paid for on an individual basis.
Company Relationship Team
We have established a Company Relationship Team to manage relationships with companies. We have also brought in-house the organisation of company management visits and overseas trips by our analysts, paying for these ourselves. However, for certain emerging markets, where a higher level of local knowledge is required, we continue to outsource the organisation of trips to research providers/partners. They bill us directly for doing so, providing visibility around costs.
Research Tender Process
For larger pieces of bespoke research, which are not necessarily company-focused, we have begun a Research Tender Process. We found we were often struggling to get brokers to adequately research the long-term non-financial issues that are so crucial to our evaluation of investment opportunities and risks.
Towards the end of 2015 we drew up a list of 12 research topics that would help address gaps in our investment knowledge. We received approximately 100 proposals from 40 different organisations across every continent: 27 research organisations (including universities), 11 research providers/partners and 2 individuals. In July 2016 we drew up another list of tenders.
(Please see our research section of our website for more details)
We believe this approach will improve the quality of our research, broaden our access to research talent and expertise, diversify sources of research and establish productive long-term relationships with new research partners. We also hope that as the process develops it will help create a clearer picture of a ‘price’ for quality research.
Research Committee & Management Team
To manage our external research we have established a Research Committee to oversee the governance of the research procurement process. Its role is to agree the total research budget and determine the allocation between research retainers, organise trips/meetings, procure bespoke research and oversee research tenders. Within each of these areas the committee will agree the allocation to individual research providers. Any member of the investment team can nominate a research provider.
We have also established the Research Management Team to oversee and facilitate core research, bespoke research and the research tender process.
We believe unbundling and paying for research from our own P&L will provide visibility around the cost of research which is clearly in the interests of all our clients. We hope to identify high quality new research partners, as well as strengthen our relationships with some of our existing partners.