Financial Times article on Amba Research

By Florian Gimbel and Amy Yee, March 05, 2007.

If you are struggling to rein in investment research costs, Andrew Houston will be delighted to give you a hand.

A former head of research at JF Securities, Mr Houston has been trying to persuade fund houses in London and New York to drop their traditional reservations about research outsourcing.

While investment bankers may brag that they can farm out tedious work to well-qualified analysts in India, fund managers have been wary of launching offshore research units or handing over tasks to specialist firms.

"We are in the business of providing judgment-based research and analysis rather than pure number crunching," says Mr Houston, co-founder of Amba, one of the biggest providers of research support services aimed at financial institutions.

The three-year-old company, which has operations in Bangalore, Colombo and Costa Rica, hopes to benefit from regulatory trends in markets such as the UK, where fund managers are required to disclose payments for broker research.

This "unbundling" process has prompted brokers to reduce some coverage, forcing fund managers to consider outsourcing as an alternative to a costly expansion of in-house research.

Another potential driver of the outsourcing trend is junior staff turnover in booming financial centres such as London. A case in point is Société Générale Asset Management, which last year sought to plug a gap in its UK research department by using an Amba analyst.

"I think outsourcing of buy-side analysis is quite limited in the UK, but I would be surprised if this were not common practice in two to three years' time," says David Benson, who leads the eight-strong UK equity research team at Société Générale.

Many fund houses have steered clear of outsourcing because much of their brand value is derived from the perceived quality of their in-house research and talent.

Critics also say potentially lax compliance standards might expose outsourcing clients to insider trading, faulty analytical processes and breaches of securities laws. For example, an India-based analyst might call a US company without being fully aware of US corporate disclosure rules.

To allay concerns, Mr Houston has been highlighting the intellectual firepower of his employees and the training they receive from experienced "supervisors", including senior ex-employees of international firms.

Amba, which has 450 employees, believes it can "recreate" the compliance culture and technical expertise of leading fund houses in London and New York.

"One day, our analysts are asked to look at bond documentation; the next day they have to value a company on a private equity basis or do a derivatives valuation," says Mr Houston. "That's why we need to have experienced supervisors who can interpret the tasks that clients send to offshore analysts."

Apart from Mr Houston, the Amba founders include two Deutsche Bank veterans and a former head of India research at Goldman Sachs. The head of risk management holds a PhD in particle physics from ImperialCollege, while the head of quantitative services is a former economist at Lehman Brothers with a finance PhD from UCLA.

"There are a lot of extremely bright people who, for family reasons, prefer to be back in their home country," says Mr Houston. He remains coy about recruiting methods and compensation for fear of divulging sensitive information in a fiercely competitive market.

Outsourcing to countries such as India has steadily moved up the ladder to include high-skill work including engineering, financial and legal research, as well as market and data analysis.

This "knowledge process outsourcing" (KPO) sector generated $405m (€307m, £206m) in revenues last year, up about 59 per cent from a year earlier, and is expected to rise to $5.5bn by 2010, says consultancy Frost & Sullivan.

Cost savings are fuelling the outsourcing of high-end services to India. Employees with PhDs in India are paid up to $80,000 less than their US counterparts. Though the quality of an advanced degree in India can vary, the country churns out far more engineering and science graduates than the US and Europe.

For example, Evalueserve, a KPO firm founded by a former McKinsey principal and IBM executive, hires employees with PhDs and MBAs for work that ranges from market research to evaluating targets for private equity firms.

At companies such as Amba, the biggest challenge is attracting and retaining talented analysts who might be tempted to work overseas. "Top people are not going to stay with us for a long time unless we can offer them a career path," says Mr Houston. "We are telling clients that they can add more value by developing specific [Amba] analysts on a long-term basis."

Rather than pure cost savings, Amba highlights the efficiency gains from outsourcing - a message that resonates with its 70 clients, including investment banks, hedge funds, private equity investors, credit rating agencies and long-only institutional fund houses.

"In a smallish shop like ours, where resources are constrained, fund managers should be focused on the things that really generate alpha," says Eoin Murray, chief investment officer at Old Mutual Asset Managers, an Amba client. "We don't want them to be bogged down in research that we think is commoditised."

Copyright The Financial Times Limited 2007

Ref: FT Outsourcing Amba Research 5 Mar 07