RESEARCH

THE EVOLUTION OF RESEARCH

The origins of FUSE reach back to the early 1980’s when the mutual fund industry felt fully supported by simple data compilations and basic statistics. During this era management companies focused on building up their distribution capabilities and rolling out enough new product to quench the needs of distributors. During the ‘90’s, data was accompanied by in-depth analysis that sought to present a sense of cause and effect but from a decidedly “rear view mirror” perspective. This phase was characterized by a heightened need for competitor intelligence that was used to identify new product opportunities as well as to provide a general sense of relative productivity. As we moved into the new millennium, the age of the study emerged with large-scale information reports designed to assist in the evaluation of particular business opportunities (i.e. SMAs, IO-DC, Sub-Advisory). Asset managers had, by and large, “maxed out” on the gains to be realized by their traditional product and selling efforts and now sought to expand their growth potential with new product structures in new distribution channels.

In or about 2006, it became clear that broad market growth opportunities of the previous 20 years were being replaced by a series of smaller opportunities which required precise tactical execution to successfully exploit. To succeed in today’s competitive environment asset managers require real-time market intelligence that aids in their ability to anticipate both threats and opportunities and to respond accordingly. However, there has been little by way of innovation among research firms and as a result the decision support asset managers needed to successfully exploit these opportunities is nowhere to be found. At FUSE we recognize that the standardized industry assessments and generic recommendations that characterize the output of most research and consulting firms fails to deliver sufficient value to warrant continued budget allocations. It is this decision support void (graphic?) that FUSE intends to fill with a dynamic research platform that is designed to support the specific needs of each client. And…unlike our traditional competitors, we accept responsibility for insuring that our clients realize tangible benefit from their relationship with FUSE.<,/p>

RESEARCH TODAY

Based upon feedback from group of all sizes, we estimate that as much as 30% of the expenditures by investment managers on market intelligence is wasted. Another 20% of the research acquired has fallen into the “nice to know” category with little by way of a causal link to key business decisions. One of the reasons for this development is that client firms have worked themselves into a rut where they simply continue year after year with what they have always done. A formal evaluation of their own business needs and the corresponding research support would identify opportunities for improvement yet these internal assessments are rarely performed. Without being challenged to keep pace with the changing demands of the marketplace, many vendor firms settle into a rut of their own with minor annual enhancements to their service offerings.

However, there are the occasional new entrants that shake things up with products and services that offer the next generation of decision support…generally through some combination of ease of use and quality of content. Firms that once believed that their performance, expense, sales and asset databases created a competitive advantage have seen that aspect of the business commoditized by the entry of firms such as Morningstar. Similarly, study production shops that assemble 100+ page documents are feeling pressure from the mass producers that dump out reams of information for ¼ of the price. Research and consulting firms now find themselves at a similar place as their investment management clients…the market will not pay a premium for “beta” but is willing to spend for real “alpha” production.

RESEARCH BETA & ALPHA

Research “beta” is derived from products that are necessary for marketplace awareness but that offer limited opportunity to the client to achieve a competitive advantage. Services that offer standardized information that is commonly used in the preparation of monthly management updates or annual board reports are firmly in the beta category…as are retrospectives on sales trends and market share changes. Research “alpha” is achieved through the application of knowledge in a way that produces tangible benefit for the client. Most clients would naturally assign their customized research projects and most consulting engagements to the “alpha” category. However, we would suggest that a direct link to implementation is a pre-requisite of the ability to deliver positive tangible impact…and given that this component is often missing…clients are consistently overpaying for what can be best characterized as partial alpha.

FUSE offerings are designed to provide clients with meaningful benefits at both ends of the research spectrum. To cover much of the basic needs for ongoing information, we offer an appropriately priced foundational research service (WRAP) that delivers enhanced value relative to competitors through customized content development and delivery. For decision support in the areas of product and distribution, the ConNext and BenchMark services include implementation support so as to improve the likelihood of success during tactical execution of business plans.

We acknowledge that our services do not form a comprehensive package to cover all of your management reporting and decision support needs. There are several data and research providers that have quality products in areas in which our clients require ongoing inputs. There are also new entrants that should be considered as they too deliver high quality products but often at prices that reflect the current level of value that can be derived from their tools and information. To provide a more practical example of how we believe a client should align their research budget for maximum benefit we offer the following:

• In 1999, a typical mid-tier mutual fund company may have a total research budget of $700,000 and would likely have allocated the dollars as follows.

  1999

  
• Data tools (i.e. SimFunds) and firms providing basic trend analysis (Strategic Insights and FRC) would have accounted for roughly 43% of the budget – all of which is clearly in the “beta” category. Individual research studies accounted for 16% but most of the providers in this space (i.e. Cerulli, kasina) offered little by way of customization and tactical implementation support and we estimate much of the information fell into the “nice to know” category. Some of the benchmarking services (i.e. Market Metrics) have sections of their overall reports devoted to the individual client but these services often times did not offer specific advice and guidance. Project support, which usually took the form of the retention of consultants with particular expertise around a specific topic / issue, is responsible for almost all of “research alpha” but only 25% of the total budget.
• In 2009, there are new research tools and decision support services available to asset managers such that they can reallocate their existing budgets in a way that significantly increase the level of research alpha they can afford while still covering their basic information needs.

  2009

  
• - While maintaining access to the data tools they need to produce ongoing management reports, firms can cut the total allocation to this beta category by employing new services like Morningstar Market Intelligence. In addition, services like FUSE’s research and analytics platform can help fund groups reduce their overall expenditure on trend analysis. The combined effect is that now only 25% of the budget is consumed by lower value-added services.
• - The allocation to “studies” remains largely the same but the mix of purchases has changed. The large data dump reports are drifting down to the $2,500 price point while services like ConNext, that are designed to deliver tangible impact, are moving up to $15,000 to $20,000 range.
• - Customized benchmarking reports and specialized project support is now free to occupy 58% of the overall budget (versus only 41% ten years ago).
• - Fund groups can now allocate 67% of their budget to services that produce true research alpha versus less than 40% in the past.

FUSE would be happy to conduct a review of your research budget allocations so as to help insure that you and your firm are receiving the highest possible return for the dollars invested.