Driving high performance through enhanced investment research productivity 1 by Sutherland Global Services

Driving High Performance through enhanced Investment Research Productivity

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Background Research Expenditure At a Glance (US & UK Buy-Side Expenditure*)

Broker – Generated

Buy-side (In-house)

Independent (In-house)

~ $5 billion

~ $7 billion

~ $1.5 billion

• Significant expenses incurred on conducting investment-research • Limited evidence on the existence of a tested, structured-process to measure productivity and drive performance of the Research function • Wide variance in performance-measurement practices, across sell-side, buy-side, investmentbanking businesses • Limited consensus on the best way to measure Analyst’ productivity and incentivise performance

*Sutherland Estimates based on TABB Group Survey and Industry Survey

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Productivity / Performance Measures – Differing Benchmarks Sell-Side

Buy-Side

Investment Banking

Analyst Rating Achieved (e.g. II/ FT / WSJ / Thomson Extel / Proprietary)

Recommendation Performance

Opportunities Identified

Portfolio Scale Achieved (Market Capitalisation of Portfolio Covered)

Ratings from Portfolio Managers

Management Meetings Facilitated

Stock Recommendation Performance

New Ideas Generated

Creativity in Deal-Structuring

Earnings Forecast Accuracy

Liquidity of Recommended Stocks / Bonds

Thought-Leadership Content Generated

Earnings Forecast Update Frequency

Volatility of Recommendation

Quality of Pitches

Coverage Initiations

Earnings Forecast Accuracy

• • •

Research Expense as a % of Revenues Cost per report Cost per company covered

• •

Research Expense as a % of AUM Research Expense as a % of Operating Cost

• •

Research Expense as a % of Rev Research cost per deal

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Re-orienting practices and skill-sets as Institutional Demand shits to EM AM industry has suffered a sharp drop in net new flows since 2007

Cumulative net flows 2009-12 as % of YE 2008 AuM

Average net flows (% of AuM at beginning of period)

North America

7% Western Europe

5.7%

Japan

4.5% 4.0%

4% 3.1%

Australia

3.2%

Africa & Middle East

6% N/A

Latin America

2% 1.0%

21%

Emerginc Asia

18%

0.1%

CEE & Russia

0% -1% 2003

2004

2005

2006

2007

-0.5% 2008

-0.2% 2009

2010

Global

23% 2%

2011

Observations • Global value of professionally managed assets is at ~$59 trillion in 2011 (covering professionally managed assets by global AM firms across 42 markets ) - similar to the levels of 2007 • Decline in growth of AuM through Net Flows: Net Flows as a percentage of AuM has seen a significant drop in the 2008 to 2011 period averaging just 0.1% compared to an average of 4% during the period of 2003 to 2007 • Shift in Net flows to Emerging markets: A clear shift in Net Flows (as a percentage of AuM) is observed from Developed markets to Emerging markets during the period of 2008 to 2011 Source: Bloomberg, DataStream, Industry Research Reports, BCG, McKinsey

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Investment Research challenges

Scattered Information

• Directly related to the problem of scattered research is the issue of duplication of work

• Investors are more cautious and are demanding greater transparency in reporting

• Results in wastage of valuable time by analyst and inconsistency in usage of information/industry data across the company

• Need for an effective research management process to support advisors with the investment decision

Increased Investor Enquries

• Lack of exhaustive investment research coverage • Inadequate Knowledge of Local GAAP’s, Regulations

• Lack of local market access Investments in Emerging Market

• Language barriers • Lack of ESG disclosures

Regulatory Pressure

• Challenges in monitoring large portfolios

• Facing challenge to find a balance of how to deliver a strong and in-depth research while remaining costefficient

• Increasing number of securities universe Protecting Existing Investments

• Low bandwidth for tracking dynamic market events on real time basis

• Identify and disclose possible conflicts around their investment research • Enhanced Focus on supervision and remuneration of research analysts • Introduction of Commission Sharing Agreements (CSAs)

Cost Efficient

• Remain cost-efficient during a time of reduced industry profitability & declining research budgets

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Analysts spend more than 50% of their daily time on heavy lifting work due to volume of information and scattered research Daily Time use by Activity 1–2 hours daily

2+ hours daily

Attending meetings & calls

• Financial services professionals spend a significant portion of their time searching for data, sifting, compiling, and formatting it into useful information, and then analyzing it to produce actionable output • ~70% spend more than two hour daily searching & compiling the information

Analyzing and compiling… Managing email inbox Searching for external info Searching for internal info 0%

10%

20%

30%

40%

50%

60%

70%

80%

% of respondents

Information Overload % of respondents

• The sheer volume of data and information available poses a daunting challenge to those tasked with making informed investment decisions • Two-thirds of all respondents say they are increasingly overloaded with the volume of information facing them at work, but that rate climbs to 73% among portfolio managers and 88% among directors of research

Director of Research

88.2%

Portfolio Manager

72.7%

Analyst

70.3%

All

67.7% 0%

20%

40%

60%

80%

100%

Sources: Research Management Survey- Pension & Investments, Sutherland Research

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The decline in research budgets of Investment Banks & desire for exclusive research will compel asset managers to move towards alternative research producers

Research Budget of Global Investment banks $10

$8.5

$ Billions

~40% reduction over 2008 to 2013

$8.2 $7.3

There has been a continuous decline in the research budgets of investment Banks

$7.0 $5.5

$5.0

$4.8

2012

2013

$4 $2 $0 2007

2008

2009

2010

2011

While Asset Managers continue to spend >$20 billion per annum on the purchase of Sell side research

Desire for Exclusive Research

• Independent Fundamental, Economic, Strategy Research

Low, 15%

Moderate, 25%

• Management Consultants

High, 60%

• Primary Research • Forensic / Accounting

Through CSA Commissions Asset managers can fund exclusive research from alternative research providers

• Quantas/Technical

Sources: Frost Consulting & Sutherland Research

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Research Process: What has changed in last 5 years Research 5 years back….. Depended largely on sell side research – Bundled Services

750 Investment Banks/ Brokers

~Most asset managers buy research from < 100 investment banks..

Research was restricted to widely covered stocks & themes and geographical focus was largely on developed countries Even in large cap space there was a big disparity in coverage with some large-cap issuers being covered by less than five analysts, while others being covered by more than 50 analysts

? Considered research partners for Cost optimization, Talent, Language Skills and Knowledge of Local Accounting (GAAP etc.)

Current Scenario Through unbundling of commission asset managers can now buy research from thousands of producers - ~40% reduction in capital allocated to sell-side research 2008 –2013 1,100

250

Independent Fundamental Economic, Strategy Research

Management Consultants

Primary Research

Monitoring larger universe of companies in over one hundred countries with increasing focus on Emerging Markets Prefer ratings & monitoring from their in-house teams / research partners (extension of internal teams) with global coverage

Looking towards research partners for Alpha Generation…through Idea Generation, Increased Frequency of Portfolio Monitoring, Early Warning Signals, Identification of Emerging Market Opportunities

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Global Sourcing of research doubles time available for idea generation and monitoring investments Accelerated pace of converting broad themes into actionable ideas Deeper Analysis/ Improved Decisions

40 % Robust Evaluation & Monitoring Process

Mix of work

Reprioritize

60 %

Old Model

Re-prioritize Manage your non-core and low Reduce value-add Track resourcetasks heavy tasks Manage and like Background Track more companies Research, per Analyst First cut analysis, Modeling Reduce effort on tactical issues

Enhance Screening Process

Make the investment evolution, and monitoring process more robust

Deeper investment analysis and due diligence before investment

Larger scanning of investment Depth of opportunities evaluation Doubled flow improved of quality ideas

Increase investment on strategic tasks

80 %

20 % With Global Sourcing

Time

Screening, Background Research, First Cut Analysis, Modeling Management meetings, Idea Generation, Deeper Analysis, Monitoring & Surveillance ÂŠ 2014 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

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Utilization of Alternative Research Providers results in measurable increase in coverage & monitoring frequency, and research Productivity Coverage and Monitoring Increases enabled by Creative Models

Idea Generation

New Investment Ideas

New Issuance

Emerging Markets Opportunities

• Increase in customized screeners going beyond regions and sectors to country level and sub sector level screeners • Increase in Validation of ideas by 2-3X • Offshore research support enables the client to analyze a new issue in a short TAT of around 4 to 5 hours • Research Partners can help in forming an independent opinion on new issues and reduces the dependency on inherently biased sell-side opinions • Larger scanning of investment opportunities in Emerging Markets • Selection of right investment ideas given the deeper knowledge of operating models, local

GAAP’s, and nuances of Emerging Market

Monitoring

Protecting Existing Investments

Primary Research & Operational Insights

• Increase in the frequency of monitoring portfolio names, e.g. IGs can be actively monitored on a quarterly basis instead of a yearly basis • Tracking movements in market/key forces closely, ensuring early warning signals • Social Media Analytics can save time in ruling out companies and cherry picking • Primary Research: Leverage extensively for channel checks, landscaping, and target identification • Use of operational insights to incorporate industry-specific insights into research