For all the talk of the death of the equity research, investment banks want to hang on to their star analysts. The problem is, most of them are not happy.
“There’s a ‘seniorisation’ trend in research teams, and to survive investment banks need to retain and hire star analysts,” says Nicholas Mather, CEO of independent research house TS Lombard.
“But these senior people are not happy. They’re working incredibly hard, traveling around the world and putting out maintenance research, rather than doing the real thought-leadership pieces,” he says. “It’s getting to the point where a lot of these stars will looking for alternatives.”
Much of this is down to regulation. MiFID II requires sell-side firms to separate research costs from other trading fees. Investment banks are still struggling to price this correctly, and budgets are shrinking among buy-side firms. The new team structure for research in in investment banking is an over-worked senior ‘star’ supported by some 20-something juniors.
There are obvious routes out – a buy-side job, a switch into investor relations, starting their own business or retiring. But maybe it’s time to be bolder.
Mather estimates that around 15-20% the market for research is held by independent houses and believes this will get bigger. TS Lombard is an independent research house that focuses on macro trends – so to some extent he’s talking up his own book. But the firm also has a more interesting proposition to senior analysts.
Its division Trusted Sources Research Partners is building a “stable” of senior equity research analysts, where equity researchers will be given the chance to produce their own research, work flexibly and make money from the revenues their work generates without actually becoming an employee.
“A lot of senior analysts coming out of the sell-side have considerable value and huge investor following that they’ve had for years,” says Mather. “But they don’t want to be wage slaves, they want to take some control of their lives. We’re saying partner with us, generate valuable research for clients and we’ll provide all the regulatory, sales and infrastructure support. Revenues are split 50-50.”
TS Lombard has 22 analysts in its macro division supported by 18 sales staff and has been hiring. It took on Ken Wattret, a managing director and senior European economist at BNP Paribas, and Steven Blitz, the former head of fixed income at Lazard Asset Management, as managing directors. And Mather says that the “door is open” to senior analysts who want a change.
Independent research houses with flexible working models are one thing. But with hedge funds and asset managers relying more on huge swathes of external data and using machine learning techniques to crunch it, researchers need to find an edge elsewhere.
Mark Pacitti, a former Goldman Sachs researcher and quant at hedge fund Citadel, has recently launched his own research firm Woozle. It aims to provide insight by pushing its researchers into the real world – getting information by talking to the right people, and conducting on-the-ground investigations.
He believes that traditional equity research is dying and needs to evolve. Being independent and free of conflicts of interest is one thing, he says, but simply shoving out research to clients is not the way to go.
“On the one hand, clients do want differentiated data, but you need to answer their questions,” he says. “We work with them to solve a problem or a question they have, rather than simply creating research in isolation and hoping someone reads it.”
One example is that he was asked by a “multi-billion dollar hedge fund” to investigate the impact of some new Lidl stores. He also claims that his approach is differentiated from the trend of hedge funds just consuming large data sets.
“As an example, a lot of people thought Moss Bros was going to have a great quarter because sales receipts were going through the roof,” he says. “But we knew that they’d launched a new website, that people were buying suits online but sending them back because they didn’t fit properly. This wasn’t factored in by most investors.”
Woozle is hiring, but Pacitti says that most analysts are not up to the job. “We need people to get out there, to roll up their sleeves and get dirty. It’s more like a private investigator job,” he said.
There are other options. Berenberg, the mid-cap German bank, is continuing to build up both its equity research and sales team in London. David Mortlock, head of investment and corporate banking, says that it aims to provide “bottom up, single stock” research that’s both in-depth and on a larger scale than research boutiques.
“There are a lot of research boutiques out there focusing on the 200 biggest stocks in Europe,” he says. “That’s fair enough, but I don’t think they’ve evolved a lot in line with where the industry is going. We’re covering 650 stocks in Europe including 300 companies with a market capitalisation of less than €3bn – a lot of small and mid-caps in the UK, Germany, Switzerland and Benelux.”
It sits between large banks and boutiques, he says. “We are a midsize merchant bank – there are not many banks of our size left in the market anymore that are not leaning on their balance sheet every day.”
Employment prospects for equity researchers remain shaky. Equity research teams were 50% smaller than pre-crisis levels in 2015, according to data from Edison Research, and another 300 have disappeared over the past 12 months. Further cuts look likely, particularly as buy-side budgets for research are getting smaller and most sell-side firms are still struggling to price their research accurately.
“Buy-side firms used to take global research from eight investment banks. Now they’re saying that they’ll take such research from three,” says Mather. “What I think will actually happen is that they will use four globally, but then also use sector-focused research from other firms or favour one bank over another regionally. Either way, it’s going to be painful for the banks.”
It’s tempting, like many senior analysts have already, simply to go for an easier life and start your own firm. But, despite doing so himself, Pacitti thinks the best option is to stick with the right bulge bracket bank.
“I still think it’s cyclical, rather then structural,” he says. “It’s tempting as a junior to leave and go and work for a tech firm, but if you can stick it out you’ll be well-placed when the market turns.”
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