Research groups: who is fairest of them all?

The recent decision by UBS Global Asset Management to prevent van Eyk Research from reviewing its funds has focused attention on whether a conflict of interest exists where a research house offers services that could be seen to effectively compete with the clients they are rating.

The Money Management Rating the Raters survey shows, overwhelmingly, that fund managers do believe the independence of research is at stake in this scenario (see table 3).

But it is also interesting to note that ‘pure’ research houses — that is, groups whose revenues are derived only from research capabilities — are a minority. To list a few: van Eyk has a fund-of-funds, Mercer, Zenith and Morningstar provide investment consulting services, Lonsec and IWL (the parent group of InvestorWeb) provide stock broking services, while Assirt produces model portfolios.

Certainly, fund managers would claim that some of these services pose a greater conflict than others, but it is becoming increasingly obvious that a research house cannot live by research alone. Developing offshoot products that can be built around pre-existing resources, namely research competencies, can seem a natural development for an organisation looking to increase revenue streams, or at least ensure that its risk profile is reduced by diversification into other areas of business.

The UBS/van Eyk drama demonstrated that some fund managers will refuse to give confidential information to a third-party competing in the same space. And this stance is sure to have its supporters. Despite separation of teams, Chinese walls, confidentiality agreements and the like, there will always be fund managers suspicious and ready to jealously guard information from a perceived threat.

But according to one fund manager, the increase in multi-manager funds means fund managers themselves are often asking competitors for propritary information.

“Some managers will have multi-manager platforms, and will be requesting information on portfolios, teams and process. All that sort of stuff goes into one arm of the business, while the other arm might be competing directly with you in similar spaces.

“You’ve got to think that there is some form of Chinese wall, and if you don’t believe that then you’re going to find it pretty hard to do business with anyone in the industry. You can run around and demand confidentiality agreements, but when push comes to shove, you’re just going to have to trust them.”

Operating a fund-of-funds inspires the greatest debate around conflict of interest, but there is also an argument that more research groups would offer such a vehicle if they had the critical mass for it to be a success. After all, if a researcher does not have a large adviser client base, then it is unlikely to recruit the funds necessary for a fund-of-funds to be financially viable. Therefore, declining the opportunity to diversify into investment management may be a business decision, rather than a strategy to avoid conflicts of interest.

This is likely to remain a grey area for some time to come, with one manager saying: “I have a strong view that research organisations should limit their activities to research to ensure they can be seen to be transparent and objective.

“I think where they offer conflicting or competing services to those people they are researching, even if they’ve got Chinese walls, they can be seen as a conflict of interest.”

Another manager takes a more practical view: “It’s very difficult, but what they need to do is have two separate businesses — completely separate, stand-alone people, no common board, no commonality at all.

“I need to know that if I’m having a conversation with a research arm, I’m not having a conversation with an investment management arm, in any way, shape or form.”