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Tools and resources from the Nitron Advisors team. We tend to blog about investing, leadership, management, career acceleration, personal productivity, securities research, and online networks.

July 3, 2006

Global Structured Products: Midterm Report Card

Posted in General, Public Markets Investing, Securities Research
by David Teten @ 10:31 am —

Global Structured Products: Midterm Report Card

Event on June 21, 2006
Notes by Margie Yuan and Eric Shahinian
Event sponsored by the Structured Products Association

What are Structured Products (SP)?

• A contract between investor and issuer, large investment banking firms
• A combination of financial instrument: 0% Coupon + Derivatives
• Minimum Investment of $1000
• Payout period ranges from 1-7 years
• Upfront fee (1-6%) or commission

Targeted Clients:

• Advanced technologies have enabled Baby-Boomers to live longer and to take on riskier investments.
• Baby-Boomers and investors nearing retirement, who are looking for a steady income stream but with higher returns than traditional bonds.


• Principal-protected note (PPN)- Guarantees the return of the original investment at maturity plus a percentage of investment gain
• Return-enhanced note- No principal protection. Promised return 2X or 3X of index with a maximum cap


• Hidden Fees
• Inadequate fee disclosure
• No dividend payout from equity-linked products
• Difficult to sell before maturity date
• Inadequate legal platform to fully support the complexity of Structured Products.

Several lawyers I spoke with voiced their concerns for the current legal platform, which has not been updated since 1930s and does not acknowledge the different degrees of risk between Structured Products and Mutual Funds.

Global Environment:

Traditional instruments are misleading. Many believe that structured products represent an industry that composes financial instruments that simply do not work, yet note the following. Options often defy logic, i.e. and put and a call option will both rise when the corresponding stock drops 20%. Warrants, as many of us know, often move in very odd patterns, often not determined by the underlying issue.

Short selling in recent years has become not only a major source of scrutiny in the financial market industry, but also a major source of influence in the marketplace. Many claim that short selling ‘stabilizes prices’ and allows them to reach equilibrium, making the market more efficient. However stock lending was only made possible last year by the SEC, and so this has been going on without concern for many years, unlawfully. Short selling is even occurring in the T-bond market, with people benefiting on the rate drops, although now it looks unlikely to occur.

The SEC is rightfully cautious of the repo mechanism in short selling, essentially the short squeeze. Thus the brokers on the street are doing their best to prevent short drawdown, as it prompts many shorts to cover the positions. The SEC law still needs to be refined in terms of the t-bond and index futures markets.

What I am trying to establish is that the financial markets with regard to traditional instruments are not that valid and secure that people should naturally rely upon them for asset allocation. The structured products space has a lot to offer.

The Canadian economy is another place to look at in discussion of Global Structured products. Canada has tremendous resources to do phenomenally, and their economy is developing quite substantially. What is the best thing about Canada is their income trusts. Now I am sure many people are saying that they know what an income trust is, but they are different in Canada. They are generally for 3, 4, or 5 years in duration, and are meant as an ideal taxing structure for mature companies. It allows the companies to pay all gross income without corporate tax. Therefore, in Canada no issue exists of double taxation, thus helping boost the economy. We will be able to find a lot of value in Canadian products.

50% of the equity IPOs in 2005 were in the retail structured products space. To be more exact, 19 out of the 40 top offerings.

Principal protected notes, a big part of the structured products industry, are becoming a bigger product, with yield by the main banks. They employ a CPPI structure, with 1:1 gearing, and up to 200% exposure to a commodity or pool of commodities. This is a desirable structure because we have to remain cognizant of the fact that in Canada only 50% of all capital gains is taxed, creating a very favorable environment. Equity forward overlays are also important to be reminded of in terms of products with yield, as the distribution is not taxed until the capital investment is recovered, then the excess return is taxed. Products can now have split share capability, where you either have 2:1 capital distribution, or 2:1 capital appreciation.

In Europe, there has been a rational shift to thematic, simple payoffs. There is a commodities focus, which has traditionally been simply overweight. Water companies are emerging as a means of investment, as they have yet to be seen as a true source of stable revenues and solid returns. Spain is known for simple payoff structures, with strike prices out of the money in many, or almost all of the products. They also have cheap options relative to their neighboring countries, and so the environment is conducive to structured product growth. Scandinavia has been, and continues to be a ‘vanilla’ country so I will not discuss it further.

Some products to note are the fund/ index linked hybrid structure. They are essentially a ten year rainbow, and convergence has been occurring in terms of derivative basis into asset management companies. Structured products in many ways have been compared to mutual funds, especially relative to the fee structure in terms of load and such.

On to questions, innovation in the industry will continue to occur, driven mainly by the exotic structures products becoming more prevalent, as they have traditionally been much less regulated than their brothers and sisters, they offer much value. In terms of accounting for the products, that is a dilemma. Decomposition is required.

The future seems to hold many things, but what is likely is that what will occur, in addition to the change in use of exotic products, more so the traditional products will be optimized and hopefully be used to a greater extent. A drawback to this is regulatory concerns. I am frightened by what India has and continues to do; requiring derivative holders to disclose their holdings. This is ok for mainstream equity issues, but the derivative industry is very sensitive for this information, and it would be detrimental to achieve substantial returns.

The Middle East has many hedge funds entering, especially multi-strategy and fund of funds. The local equity markets are rising to enormous highs, and continue to rise, and real estate is also faring well. Money was invested locally until recently, but foreign investment expansion will be the key to develop the market there. More shareholder friendly products could help, as derivative option products are not allowed, with typically option + zero coupon bond structure. However interesting to note is that products still exist in similar forms, allowing us to conclude that the products are simply restructured in a way as to facilitate the product being offered pursuant to regulations.

A product that should be looked upon further in the mandatory exchange bond in terms of its use and the Time Warner/ Icahn deal. The offshore entity to accomplish its goal of returns can find usefulness in the product.

In the general marketplace, the structured products world impacts very little. There are an estimated 200+ products, with $20 billion of purchasing power. This industry particularly impacts the emerging markets as a very viable means to gain access.

Exchange traded notes are essentially a complex bundle of exchange traded funds. In general, it would be safe to say that we can consider structured products bundled instruments, often of debt and equity notes. Fees are something that this industry, much like the mutual fund, and especially hedge fund industry, is being scrutinized. Fees will likely go down substantially in the future. Hedge funds do not invest in structured products; they may use them to gain access to niche markets that are not typically available to them. Often times, however, swaps can be simply used to lever the returns. What needs to be clarified is that correlation swaps are OTC derivatives, not at all structured products.

June 28, 2006

Multisided Markets–HBS Professor Andrei Hagiu

HBS Professor Andrei Hagiu is an expert on multi-sided markets, and recently interviewed me on that topic: Market Platform Dynamics–Catalyst Conversation: Conversation with David Teten. His site requires that you submit an email address to read the article (but I should note that he doesn’t actually test if the email address is functional.)

June 23, 2006

Shawn Gold, SVP, MySpace: Marketing in a Networked Culture

Posted in General, Social Software, Public Markets Investing
by David Teten @ 4:11 pm —

Following up on my draft post on ‘Business Models for User-Generated Media‘, I wrote some notes on this morning’s iBreakfast.

Shawn Gold, SVP, MySpace: Marketing in a Networked Culture

MySpace has 100m users projected by july

84m registered users, 2m new registered users per week (size of Houston), 48m unique visitors per month in US

2nd most popular site for content consumption on the Internet, as defined by page views. 29000 indie film profiles. 1.8m music profiles.

#1 video viewing site

#1 referrer to Google—8.19% of Google’s traffic

42% of YouTube viewing is happening on MySpace.


MySpace will become THE full service community portal

Introduce innovative advertising solutions while being at forefront of pop culture

DNA of Myspace Generation : MySpace is their place. Where youth culture gathers to express themselves, connect with friends, and discover popular culture.

Big differentiator from competition is the way MySpace is used to discover popular culture, i.e., bands/TV shows.

All the growth is viral—they market to influencers not to audience members.

Nielsen: Myspace reaches 51% of 13-17 year olds online (which is 85% of all 13-17 year olds).

79% of the site is 18+, and 25M users who are 30+.

Why so successful:

-A user’s profile is a metaphor for their room or apt.

- The Internet generation has grown up sharing their lives

- The profile is a characterization of who they are

- They want to express themselves creatively.

Children lack a ‘their space’. 7-11 doesn’t let them hang out in front; the mall security guards kick them out. They’re used to being in public. MySpace is a form of identity production.

Everyone takes pride in their medium. It’s ‘vested media’ because they created it.

When people say the pages are unwieldy, just think of a teenager’s room.

Social networks/blogs serve as a publishing platform for early adopters. Word of Mouth has turned into ‘citizen journalism’, which people trust more than traditional media.

MySpace allows brands to become living, breathing entities that consumers can interact with.

Best brand programs tie into self-expression, facilitate connections between people, or is centered around the discovery of popular culture.

87m stories in the database, and a lot of that content is professional. Every nightclub, every major Christian band, every celebrity brand, is in the database. They’re now slicing the database by professional type, e.g., if you want to reach all the comedians.

Basic idea of marketing: "Tell a Friend"

Average page is visited 30 times a day. If you’re in the top 8, your exposure is exponential. XMen has 3.2m friends. If you friend them, you can have top 16 friends, instead of top 8.

Core: identification and individuality. Don’t separate them—that’s Geocities. Understand core needs (identification and individuality), and address their core needs: recognition, knowledge, self-expression, belonging, access, discovery, appreciation, and confidence.

We facilitate this on a social networking platform.

Next speaker—-Shelly Palmer, author, Television Disrupted

Five buzzwords you can use right now. You will sound like a genius if you use these.

- Mobile video: clipcasts or streamcasts. He dislikes the term ‘cellphone video’, because not all mobile video (e.g., ipod video) is via a cell tower. Why does ESPN Mobile have only 2400 subscribers—because it’s $30-$400/month. It’s a MVNO—they own the handset and customer experience. They’re $30M in the hole. All the vanity cell services will meet the same fate. ESPN invested a lot of money into the technology. Behaviors change glacially. In the last century, fastest time to market for an electronic tool was Xerox machine. It killed carbon paper extremely quickly. Instantly successful. Normally new tools take 5-100 years—fax machine took 100 years.

- IPTV—Internet Protocol Television

- Broadband Video—call it ‘IP Video’. ‘Streaming Video’ is a silly term.

- Podcasting—he hates this word. A use of the RSS spec—it has nothing to do with IPods or broadcasting. Coined by Adam Curry. Based on XML spec. Blogging is the most popular use of RSS.

- Mesh Networks—each node connects or two or more nodes. No central server. Self-healing. Hard to shut down. Napster was a file-sharing network, therefore easy to shut down. If they’re wireless they’re a swarm. BitTorrent is best example of a mesh network. Cant be used in real-time streaming.

Oct. 12, 2005: the date that Steve Jobs and Eiger unilaterally decided to put TV shows on ipod—Desperate HouseWives. Very controversial with affiliates. The day the TV world changed.

"Contact is King!"

Different words for all of you in the audience:

Cable companies call customers ’subscribers’

Phone companies call them ‘access lines’

TV cos. Call them ‘Viewers’

Computer cos. Call them ‘users’

2/17/2009: all analog TV spectrum will go digital. Your old analog TV won’t work. The good news: all the old analog frequencies will be reclaimed by the gov’t and auctioned off. Most likely it will be used to create a large broadband cloud—WiMAX? No longer will you use a little local wifi network—you’ll use the large broadband cloud. Hermistown, OR has largest broadband cloud in America: 700 sq miles, 5 megabits. It’s like living in Star Trek. Cant handle lots of streaming video/VOIP, but it’s enough for email. Intel is banking heavily on WiMAX.

Every cell phone call ends with ‘hello’, instead of ‘goodbye’, because of connectivity problems


Shawn: They review every photo/video uploaded to myspace

Any member can report objectionable content

25000 volunteers police school site

Algorithms that search for underage kids—e.g., mentioning 12 candles on a birthday cake. They kick off 5000 underage kids/day.

Myspace is the size of two Californias—and the crime on the site is equivalent to 5 blocks in NYC

June 19, 2006

TieCON East: Trends in Investment Research and Due Diligence.

My colleague Scott Lichtman took some detailed notes on the TieCONEast panel last week on “Trends in Investment Research and Due Diligence”.

Podcast is here.


Graham Field, Managing Director, AQ Research (Moderator)
Graham is the Managing Director of AQ Research, which provides quantitative global analysis of the accuracy of sell-side research. Graham established AQ Research in 1998, having worked as a financial journalist since 1987. He was editor of Asiamoney and of the International Tax Review, as well as presenting business programmes on BBC radio and television. Graham’s books include Economic Growth and Political Change in Asia (1995), Japan’s Financial System: Restoration and Reform (1998) and Euroland: The Future of Europe’s Capital Markets (2000). He is a graduate of Cambridge and London Universities in the UK

Susan Oh, Director & Senior Analyst, Merrill Lynch
Susan’s responsibilities include manager research and the analysis of hedge funds. She is also the portfolio manager of the Merrill Lynch Event Driven Fund. Her focus is on invested managers as well as identifying new funds. Prior to joining MLIM, Susan was a Senior Analyst at Tremont Capital Management. At Tremont, she conducted due diligence on hedge funds and strategies to make strategic recommendations to the Investment Committee. Her other experience includes Citco Group Ltd. and Smith Barney, Inc. Susan was a hedge fund analyst for Citco and an Institutional Sales Assistant at Smith Barney in the hedge fund group.

Dave Furneaux, Founder & Managing General Partner, Kodiak Venture Partners
Prior to Kodiak, in 1996, he co-founded Furneaux & Company, LLC, a seed stage high technology venture investment company. He was the founding investor and active Chairman of the Board of Extreme Packet Devices (acquired by PMC-Sierra) and Philsar (acquired by Conexant). He also was a founding investor, Vice President of Business Development, and member of the board of Skystone Systems (acquired by Cisco Systems), a founding investor in Solidum Systems (acquired by IDT) and an early investor in Telica Systems (acquired by Lucent). At Kodiak, he was an active early investor in AuroraNetics (acquired by Cisco Systems), Watchfire and Raza Microelectronics.

Gregory Locraft, Vice President, MFS Investment Management
Gregory Locraft is the Vice President of MFS Investment Management and a Portfolio Manager of the $2billion MFS Capital Opportunities Fund and related portfolios. Mr. Locraft joined MFS in 1998 as a research analyst. He became a member of the Large Cap Growth Portfolio Management team in October 2003 and was named Portfolio Manager of MFS Capital Opportunities Fund in December 2005. Previously, he was a Senior Consultant for Kaiser Associates, Inc. Prior to that, he was a Financial Consultant for Smith, Barney, Inc. He received a Bachelor of Arts degree in Political Science and History from Williams College and an M.B.A. from Harvard University.

David Teten, CEO, Nitron Advisors


Scott Lichtman’s notes:

Furneaux: $700M under management. 8 partners. investing throughout the northeast, and also some emerging markets. 50% of investments are with people we invested in before.

As a Private Equity firm, we are constantly communicating to our managers to find depth in companies. The average time from startup to IPO is 8 years, from IPO to acquisition is 6 years. To pick the right companies, combine analyst inteligence (awareness and insight) with due diligence.

Locraft: Good researchers are leaving sell-side and traditional buy-side & going where there’s a piece of the action.

Teten: Gave overview of Nitron Advisors’ business model. Quoted prominent industry CEO, who said, “If you’ve been in research > 5 years, you’re not a good stock picker.”

Locraft has 45 analysts. Average hold on a stock in the market is 11 months. 40% of trading volume is from proprietary desks. They compensate staff to think long-term, which they define as 3 years. They usually only invest in companies with >$500M in assets. MFS is a $170B firm with $2B in Greg’s fund. “The level of scrutiny we’ve undergone at MFS has made us take a whiteboard approach to the P&L.” MFS is concerned about raw trading costs.

Susan Oh: Our area invests in all major strategies: long-short equity, relative value driven, CTAs, global macro. She focuses on event-driven. Due diligence starts with an on-site visit. We look at management, firm, infrastructure, risk management, operations. red flag: concentrated investor base. Such investors may have preferential rights…which could hurt smaller investors.

What is the quality of sellside analysis information? Do you compare internal analysts with sell-side?

Locraft: Yes – analyst compensation is based on stock picking results vs. sell-side recommendations. We use AQ’s competitor, Starmine.

Field: What if your analysts aren’t that good?

Locraft says there are certainly cases where some analysts are better than others, and therefore some of our analysts by definition aren’t top of field. MFS will pay accordingly for specific sell-side analysis in these cases. But we recognize the disadvantage of information being disseminated to all parties at the same time via FD.

David Teten: How do you measure ROI of research?

Oh: One hedge trader I knowwill only buy research when it’s contrarian to the general street consensus.

Locraft: ROI on a good analyst’s picks is enormous – so massive it’s not worth measuring.

Dave Furneaux: the early stage challenge for PE/VC investors these days is that there is more money than opportunities. This means for any evident investing opportunity the returns are lower due to increased competition for investment dollars. So the key is to find an investment idea others don’t know about or appreciate.

June 14, 2006

Seeking E-Commerce / Internet Experts for Boston Hedge Fund Dinner, June 22, 2006

Seeking E-Commerce / Internet Experts for Boston Hedge Fund Dinner, June 22, 2006

We are organizing a hedge fund dinner for E-Commerce / Internet Experts in Boston on June 22, 6:30pm. This is a chance for you to talk with and learn from some of the major hedge fund investors in this sector.

We’re looking for people with the following backgrounds, preferably with strong international background:

+ Search-engine-optimization expert (e.g., Reprise Media, competitors)

+ Large eBay power-seller, or someone knowledgeable about the eBay drop-off franchise business (e.g., Auctiondrop, iSoldit, QuickDrop, etc.)

+ Voice-over-IP executive/expert (e.g., Skype, Vonage, etc.)

+ Online travel industry – possibly with experience at a meta-search travel site (e.g., SideStep, Farechase, Kayak, Mobissimo, etc.)

+ Executive or expert familiar with the job search or jobs classified business (e.g.,,,,,,

+ Paid search (or general online) marketing from the perspective of an ecommerce business

+ People familiar with the competitive environments of the following companies:, Amazon, Ebay, Monster, Netflix, Blockbuster Online, Overstock, Red Envelope, Bluenile, CNet, Google, Infospace, iVillage, Microsoft online, Yahoo, Orbitz, Ctrip, Expedia, Travelzoo, Skype, etc…

Qualifications: As an expert, you have at least four years senior experience in the Internet/e-commerce space. You have a “big picture�? perspective on different firms in the space.

If you are not already a member of our Circle of Experts, please visit and apply to be a member of the Nitron Advisors Circle of Experts. Otherwise, please contact Mr. Avi Mally, [1] (212) 682-5874, amally(@), with any further questions. Please note that we must review your biography and talk with you before we can accept you for the dinner.

June 12, 2006

James Chanos, Kynikos Associates President, on Independent Research at the Crossroads

Posted in General, Public Markets Investing, Securities Research
by David Teten @ 10:48 am —

James Chanos, President of Kynikos Associates, whose fund accounts for 90% of institutional short funds in the US, delivered a very well-thought out keynote at last week’s Investorside research conference, on “Independent Research at the Crossroads.”

Yale BA.
He has $2.9b under mgmt. And there’s only $3.3b in institutional shorts overall. So has >90% of the market.

James Chanos:

It’s best for me to speak after lunch because my talks are “unsettling but not nauseating.”

Independent research is a cottage industry, with low barriers to entry. Flexible.

Is free speech not protected in bull markets?

Forces of darkness:

*issuer intimidation
*soft dollar concerns
*customer concentration

1985: he’s had private detectives go thru his garbage.
1983: critiqued Waste Management Inc. Said it was accounting spam. The (size XL) CFO told him, ‘This is a small town, OK?’
Owen Lamont at yale has done great research on this, showing that the more an issuer intimidates, the worse their underperformance later.

2 current cases:

Organized plaintiff’s bar is now looking into the short selling business, which is bad news for independents.

Keep your business in federal not state courts…they’re much friendlier to free speech than state courts.

Hedge funds are only 5 -10 percent of equity value worldwide, but could be 20-40 percent of trading volume.

50% of total hedge fund dollars are from fund of funds, and as much as 80% to 90% of inflow in last 2 years. Given the 2 layers of fees, Fund of Funds will soon pull back.


*sell side backsliding
*customer growth
*recent history
*US constitution

Investment banks are again hyping stocks. You can’t legislate fear and greed.

Level of sell side research in EU is “laughable”. Kynikos just opened office in UK; they only have 2 indie vendors in UK that they use.

Jeff Skillings in his testimony in the Enron trial said, “I threw down a piece of independent research (from an Investorside member) and said, ‘They’re on to us.’.” You, the independent research industry, should market this story! This is the greatest PR the industry could have.

His lawyer said: “securities fraud is trading on, or inducing others to trade on, info you know to be false.” That’s a definition he’s comfortable with.

This is the allegation that hedge funds, in cooperation with indies, are conspiring to destroy companies. As opposed to companies doing a poor job of managing themselves.

It is illegal for a US investor to sell short a stock that it hasn’t borrowed. The exception is for market makers engaged in legit market-making activities.

Where do “failure to delivers” a shorted stock come from? From broker-dealers.

There’s a suit now against a broker-dealer inquiring why the fund (who sold short) is being charged large negative rebates, given the broker-dealer wasn’t naked. This is an important suit that is being followed closely.

Never let Washington regulate you after the fact.

He’s active in the Coalition of Private Investment Companies. We ignore
Washington at our peril.

Indie research is a great story that needs to be told, and sold.


Q: What metrics should a short look at?

A: Mgmt. has gotten more sophisticated about what to hide….what metrics shorts are looking at.

Land partnerships at homebuilders is ‘across the line’. They have huge hidden leverage. top 5 homebuilders had bigger ROE than google last yr….that’s not sustainable. Many homebuilders are disintegrating fast.

Historically Kynikos’s best trades have been value stocks. They looked cheap….all the way down.

Recommended book: ‘Accounting for Growth’. he gives it to all his new analysts.

Teten: why aren’t there more institutional shorts?

* it’s no fun. Months of pain punctuated by a few hrs of pleasure.
* wrong psychologocal makeup. Many smart investors are very poor short investors.

June 11, 2006

Investorside Independent Research Provider Conference

Posted in General, Public Markets Investing, Securities Research
by David Teten @ 12:31 pm —

Some notes from June 8’s Investorside Independent Research Provider Conference. Integrity Research also blogged about this event.

8:45am-9:00am Welcoming Remarks from Investorside
John Eade:

Retiring as Chairman of Investorside, and turning over Chairmanship to Stanton Green of Vista Research.

Investorside founded with 2 firms (Argus and Precursor), and now has 73 members.

He thanks board, including:
Stanton Green
Lisa Shalett
Mike Mayhew
Doug Atkin
Howard Shilett
Scott Cleland

9:00am-9:50am Panel 1: Soft Dollars: Guidance on New Rules and New Trends

Featuring leading industry representatives and regulators discussing the new framework of client commission usage in the US and UK

John Meserve (Moderator), Director, BNY Jaywalk & Westminster Research Associates/BNY Securities Group, new board member of Investorside. Member of SIA’s Institutional Brokerage Committee & Alliance in Support of Independent Research. Worked with Bush transition team on behalf of Mossbacher; worked in US Dep’t of Commerce during Reagan administration.
Jon Giblin, Lehman Brothers, responsible for electronic marketing efforts and US soft dollar efforts
David Quinlan, President, Eze Castle Software, and investor in Code Red
Alex Vasilescu, Securities & Exchange Commission, trial committee

John Meserve:

3 years ago there was pandemonium that soft dollars to purchase independent research would be banned. That’s not happening either in the US or UK. Regulatory authorities have repeatedly said that independent & proprietary research should be treated equally.

Also good news for indies:
- trend towards unbundling
- reduction in coverage by large firms

To the audience: Don’t miss your time to perform in this space!

Transparency & disclosure train has left the station. UK market has made bold strides on how commissions will be managed going forward. UK approach is bleeding into US market. Billed as ‘Big Bang 2′ by Paul Miner, of Miner’s Report on Investment Practices.

Managers will need new tools, new systems, & new approaches .

A new financial services sector is growing, just like TCA sector (Transaction Cost Analysis).

Alex Vasilescu, Securities & Exchange Commission, trial committee
I’m speaking from enforcement perspective, against people violating Section 28e Safe Harbor.

11/25/2005: Commission responding to a decade of evolution of soft dollar practices
Gave guidance on what will be appropriate practices for obtaining safe harbor. Clarify scope of both brokerage & research services. 28e is about providing advice regarding investing/selling/availability/purchasing of securities.

Not qualified: Overhead, travel, phone lines, furniture, rent, accounting services, salaries.

As money managers and B/Ds are required to give full disclosure, it benefits the independents. Service has to relate to subject matter of the trade.

Another area of discussion: mixed-use items, e.g., a tool for both analysis & marketing. Burden is on money manager to break out those two categories. Many advisors are urging buy-side clients to make this disclosure because they have legal exposure otherwise.

3rd party research can’t be completely divorced from the trade. Legally, broker-dealer (B/D) must be on the hook for payment to 3rd party. This won’t compromise all 3rd party business. B/d must also in some way be affecting the transaction.

Jon Giblin, Lehman Brothers, responsible for electronic marketing efforts and US soft dollar efforts

Lehman has had conversations with other clients about unbundling. This is a market structure conversation.

Look at what happened in Europe: split between execution & research is disclosed. This has shrunk the # of brokerage parties in the UK, subject to best execution. Much more flow in a smaller number of execution providers. SEC is tackling the disclosure issue.

Our def’n:
1) Big-U unbundling, or economic unbundling, e.g., Fidelity –Lehman deal. Fidelity is paying for research out of their profits.

2) Little-u unbundling: See-through of allocation of execution costs and research costs. Most clients choose little-u.

Buy-side often has to trade illiquid securities with 2nd-tier, 3rd-tier providers.

Transparency is key.

David Quinlan, President, Eze Castle Software, and investor in Code Red

He has 300 clients

Industry issues:
- pending 28e regulatory changes
- unbundling
- disclosure
- increased transparency
- regulatory audits
- lack of automation for a very crucial aspect of investment management.

They specialize in commission management tools. Classical process is email & Excel driven—very informal, proprietary, and insecure

Research Content providers–>Research Management Software–>Commission Optimizer< -->Order Management System

They want to provide a scoring/quantitative tool for this whole order process.

This process can and should be automated, and it’s happening today.


There are complaints that investigators are spending more energy pursuing money spent on indies as opposed to buy-side, because indies provide a trackable expense item.

Giblin: Clients sometimes determine execution level for a trade (DMA, algorithmic, etc.), and then tack on a cost for research. There will never be one-size-fits-all pricing for the industry.

Audience question: How would commission-sharing arranagements take off here as they have in UK? 2 problems with that analogy:
- how do you define provider of research?
- NYSE ruling: broker cannot share a commission with a non-broker-dealer.

There will be liberalization.

Sununu and Schumer have both been supportive of indie reseach.

9:50am-10:40am Panel 2: Proving Performance
Buyside executives, research performance measurement experts, and research providers discuss how to most effectively value analysts’ performance quantitatively and qualitatively

John Eade (Moderator), Argus Research
Evan Cooper, Institutional Investor Magazine
Mark Fichtel, Lehman Brothers
Georgette Jasen, Wall Street Journal


Georgette Jasen, Wall Street Journal
Has run poll for 14 yrs.
Data is entirely from Thomson.
Strictly quant—we rank top 5 analysts in each industry group, using Dow Jones’ industry classification approach & FTSE. Industry classifications sometimes controversial. Give equal credit to buy & sell recommendations. Extensive verification period. We post data on Statcheck website. Verify data based on interviews with analysts.

Biggest change is we no longer include earnings estimates, because we could not be internally consistent. Analysts and companies were not measuring earnings in the same way. WSJ now exclusively reports GAAP earnings unless specified otherwise.

Industry groups do change periodically.

We moved to simple buy/hold/sell form of analyzing recs. A hold is a neutral rating.

To track data, they use market close from day prior to recommendation, because they can verify the price. WSJ often gets questions about this issue. Most recommendations are made early in the day, so that’s reasonable.

Evan Cooper, Institutional Investor Magazine

‘a beauty contest’. A measure of what clients think product is worth to them. Published in Dec. issue. We start early in year. Ask buy-side what results were. Last year had 71 categories. 3400 PMs at 700 institutions get the survey. Had 690 voters. In 49/71 categories we had enough votes to pick winners.

Mark Fichtel, Lehman Brothers
Independent consultant in Research Settlement.
I follow the three Rs: Reading, Riting, Rithmetic

Pay a lot of attention to:
- ‘rithmetic (how well recommendations perform). He uses larry bloston at Columbia Biz School and Rajiv Jagarnathan at Kellogg to analyze this. They strictly measure alpha
- reponsiveness. As of 1/06, he told firms he expected them to issue reports within 48 hrs. of a relevant event. I was surprised by long delays between times when co. reported earnings and when indie would issue report. Many indies still don’t understand that vast bulk of investors have been pavlovianized to expect a report within 24 hrs. of an event, so that their clients have some idea of what that event means.
- readability. reports’ written quality

He represents the non-professional clients of the brokers. He uses 37 IRPs, monitors 59 firms, who cover 1350 stocks. He goes stock by stock. Overall annualized alpha is about 6% for all these firms—from -42% to +80%. His system is only about 2 years old.

I am constantly amazed at the variety of ways in which people measure earnings. Also amazed that an analyst can say earnings will be $0.15 below street and still call the stock a buy.

We decided we wanted to get the influence of the market out, and that’s why we switched to an alpha.

He draws data only from Jaywalk.

Settlement funds only cover research. All other expenses (e.g., Mark’s salary and technology) are paid for by the firms outside of the settlement. So his methodology belongs to Lehman. He won’t be publishing it.

To track data, they use market close from day prior to recommendation, because they can verify the price. They measure cumulative daily alpha.


Teten asked how to measure comparative research performance of expert network providers.
Evan Cooper: with votes
Mark Fichtel: there’s no way
Georgette Jasen: there’s no way

For private clients, 20-50% of research used is from indies.
Almost all of research that’s being used is used by broker and then conveyed orally to client. Very important to reach brokers and capture their enthusiasm and loyalty.

This has been major source of revenues to some indies, but they need to be event-responsive. If they fail to do so, they’ll see $100M of revenues /year disappear

Georgette: Bulge-bracket firms get more awards because of the # analysts they have.
Evan: 3/4 of buy-side uses indie research
Mark: performance drives performance of indie research. Indie firms don’t take enough time to explain the reason for their recommendations.

Clarity of ratings is very important.

10:40am-11:30am Panel 3: The Future of Institutional Investment Research
Research firms discuss the seismic changes facing the institutional investment research industry

Lisa Shalett (Moderator), Sanford Bernstein
Stanton Green, Vista Research
Rich Leggett, CFRA
David Weild, The NRE


Lisa Shalett (Moderator), Sanford Bernstein

Enough with the ‘re’s’—repackaging, regurgitation, recycling, etc.
“Put the search back in re-search”
We get paid based on value-added
We should be an advisory

Rich Leggett, CFRA

We try to put yourself in client shoes, part of the mosaic of data they have. Become part of the fabric of client’s thought process. They want to be go-to firm for hard-core number crunching.
Overall pie is shrinking. And it’s not overly clear that it’s favored the independents.
Research world is overcrowded. Draws analogy to excess of vendors in the tech bubble.
Lots of noise out there.
Each client is very different: communication preferences, etc.
More people will take research to low-cost regions.
Constant churn in the client base—who’s changing sectors, who’s changing firms.
Buy side is going thru a professionalization of procurement function.
Traditional sell-side changing rapidly.
We should be a consultant/service partner, not a publisher. ‘a trusted partner to our clients’.
We need to mobilize for success in a meritocracy.

4 buckets:
- risk mitigation/save money
- opportunity creation—help them make money
- saving time
- saving money

You must rise above the noise. Get research to right people at right time.

You must be: Differentiated, high-quality, original.

David Weild, The NRE

Decimalization has sucked life out of the low end of the market. We’re working on a white paper on distribution of research of indies vs. i-banks. There’s about 10x more investment banking reports than there are independent reports (as measured by # reports).

At low end of market, there’s not much research at all, because economics don’t work. This is a challenge to the goose that lay the golden egg, of capitalism.

We address this challenge by: Research community enters into contract with NRE, not with investment banks or with companies. We mitigate conflicts for a living.

There’s an arms race going on, on the buy side. They’re very interested in the quant firms.

Stanton Green, Vista Research

Caveat: our comments are focused on institutional not retail research.

Clients will tell you what they want.

There’s still much more $ in long-only than hedge funds. If hedge funds have $1Tr, that’s only 2x what Fidelity does.

Our product has the feel and look of a proprietary product.
When we started our firm, we talked with 150-200 funds. All of our clients want, #1, better industry information. That historically has come from an analyst who does really deep industry digging.
There’s a lot of talk about sell-side research going away, but I don’t believe it.

He was recently on a panel in which overwhelming majority of CIOs of long-only shops all said that they wanted to spend more $ on building their in-house research capability.

SIA poll: 3rd largest spend of buy-side is on compliance.

From day one, we’ve built a culture in our firm around compliance. It’s part of corporatization of hedge fund world.

We’re a service-oriented organization. In a recent Greenwich Associates poll, we have 95% customer loyalty. We’re a partner, knowing what they want. We don’t divulge our client base, what we know, what we hear. Certainly a partner with regards to compliance.

Audience Q&A

Q: How are you dealing with problem of issuer retaliation against analyst?
Rich: as policy, we try to talk 3 times with a company before issuing a report. Before we publish anything, it goes thru a strict vetting process.

June 1, 2006

Why Do Investors Choose High-fee Mutual Funds Despite the Lower Returns?

Posted in General, Public Markets Investing, Securities Research
by David Teten @ 9:44 am —

With their combination of low fees, tax efficiency and simple, autopilot investing style, index funds seem to have captivated American investors. At the same time, however, many investors still hold trillions of dollars in high-fee funds despite well-publicized evidence that low-fee alternatives offer higher returns over the long run. “It struck us that most people just don’t know what mutual fund fees are. So we set out to actually test that,” says Brigitte C. Madrian, professor of business and public policy at Wharton. The result is a paper titled, “Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds,” by Madrian, Yale professor James J. Choi and Harvard economics professor David Laibson.


May 18, 2006

Kellogg-Recanati Executive MBA Handbook

The MBAs of the Kellogg-Recanati Executive MBA program have posted summaries of all of their classes at:

This is a handy reference site—a summary of what you learn in an executive
MBA, all on one website.

May 15, 2006

Dealbreaker/Bullpen Report

For the lighter side of Wall Street, check out:

“DealBreaker is an online business tabloid and Wall Street gossip blog. It seeks to cover the personalities and culture that shape the financial industry, offering original commentary, news and entertainment.”


The Bullpen Report has much more of an insider’s feel, given that it’s written by investment bankers (Harvard MBAs) as opposed to journalists.