How much should a portfolio manager be willing to pay for research? The question is of importance to any manager, but has become particularly pertinent since newly imposed European rules require that the costs of investment research—previously offered by many investment banks as an in-kind consideration in return for brokerage business—be unbundled from trading.
Unfortunately, attempts to determine a fair value for research in the most general circumstances are doomed to fail. Even if we only consider direct recommendations to buy or sell certain securities, the value of such recommendations to a portfolio manager will vary according to the absolute size of positions taken in response. Instead, we provide a framework for estimating relative research values across markets and constituents, under certain stylized (but reasonable) assumptions.
Exhibit 1 provides a summary of our main result—comparing the putative value of recommendations in selected markets, expressed as a multiple of the equivalent measure applied to stock-based recommendations within the S&P 500®.
Exhibit 1: Average “Value of Research” in Various Markets and Segments
Source: S&P Dow Jones Indices LLC. Data based on monthly averages from October 2008 to September 2018. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.