The Financial Times reported today that the Capital Group, one of the largest money managers in the US, and one traditionally strongly dedicated to in-house research, is cutting jobs for the third time in six months. Here’s the link:
It’s not hard to understand the reason. Given a roughly 50% decline in world stock markets from the top, plus possible redemptions by mutual fund or institutional shareholders, management fee revenues for this month could easily have dropped to 40% of their level at the top two years ago. Profits could now be a quarter of their high water mark. The situation is doubtless worse at smaller firms. Companies less dedicated to doing their own research than Capital will likely lay off proportionally more analysts and portfolio managers.
The equity market downturn is only the latest in a number of developments that have tended to reduce the amount of sophisticated analysis in the hands of institutional investors.
The most important are:
*Many years ago the question of which brokerage house employee gets credit for generating commission revenue from clients–the research analyst or the trader–has been decided in favor of the latter. As a result of their diminishing share in company profits, seasoned analysts have been gradually leaving the brokers for a long time. This movement has accelerated over the past few years as hedge funds have sought this expertise for themselves.
*At the same time, it seems to me there has been a long-term tendency among institutional money managers to deemphasize in-house research. This has two short-term benefits. It makes the business simpler. It also means part of the cost of obtaining specialist investment information is no longer borne by the manager and paid for from fee income, but is paid for by the manager’s client through “soft dollar” “research commissions” that the manager directs to brokers and third-party research services.
Why is any of this good? The breaking down of established institutional information gathering an analysis networks, long in train but accelerated by the market downturn, will probably make world stock markets less efficient. But this gives the serious amateur the best chance he’s had in the past twenty years at finding out and acting on information before the market does.