UK
In 2003, an equity researcher was a bad thing to be. Henry Blodget had just been banned and fined 2m. Eliot Spitzer had proven widespread corruption among equities analysts, whose main purpose it seemed had become praising companies to help win corporate finance work. And in the absence of praising companies to help win corporate finance work, no one knew how equity researchers were going to get paid.
Eight years later, Eliot Spitzer’s disgraced himself and equity researchers are hot. While headhunters in other sectors are mired in pessimism, equity research is one of the areas where there’s a lot of front office hiring right now.
As if to underscore the popularity of research, when UBS appointed a new head of its leading equities business last month, it chose its previous research head for the role.
Why?
How is it that researchers have achieved such popularity?
1) They had it coming
“For the last few years, equity researchers have been under-appreciated and underpaid in the context of investment banks,” says Simon Maughan at MF Global (himself an equity researcher). “Historically, too much emphasis has been placed on paying distribution and execution and not enough attention has been paid to research. Banks have been like supermarkets which pay the cashiers, but not the shelf stackers.”
2) They are the key differentiators
Bernstein Research analyst, Brad Hintz says the margin for trading equities is half that for trading FICC products, and falling. As executing trades becomes a lower and lower margin business, it’s all about attracting customers and gaining ‘flow.’ This is where equity researchers come in.
“MiFID means I could open a trading shop tomorrow,” says Maughan. “But in order to offer the best prices and the best execution, I’ll need customer flow. And how better than to get that flow than by offering customers some incisive research?”
3) Prop trading is dead
Under the ever-evolving Volcker Rule, banks have fallen over themselves to pull back from proprietary trading. As prop trading has become less important, flow trading has become more important. Flow trading requires clients and winning clients requires research (see 2).
4) Chinese Walls don’t really exist
Cynics, however, suggest that equity researchers are popular mostly because they’re still crucial to landing IPO deals and other corporate finance work. One bank claims to have recently done some research showing that only 6% of a rival’s research recommendations were a sell, suggesting some degree of partiality.
Last month, the Financial Times highlighted research suggesting Chinese Walls are porous.
And one deeply cynical equity research headhunter says JPMorgan’s desperate search for a Spanish banks analyst to replace the team who defected to Credit Suisse in February was inspired by the urge to get in on the business of restructuring Spain’s cajas – something it can’t do without a team of Spanish banking researchers in place.
Drizzling on the parade
Some people, however, question whether equity researchers are really that desirable. Oliver Rolfe at search firm The Spartan Partnership says there’s demand for people in key sectors like telcos, utilities, oil and gas, but that researchers peripheral sectors like real estate are being slashed.
Other headhunters agree. “Nomura just let go of people in real estate and autos,” says one. “If you work in key sectors you’re fine. If you don’t, you’re not.”
But its all made up!? They’re just bloggers who can use Excel!
Thats not true. Its a highly skilled job. Unfortunately most of them are rubbish at making stock calls, and in today’s environment theres been a move towards trading news-flow rather than taking long-term investment positions; that seems set to continue given global uncertainty and the fact that in today’s environment share-price movements are more due to a much lower discount-rate than they are due to earnings revisions. But certainly in some sectors analysts do add enormous value by being at the cutting edge of market events e.g. financials. Thats why its such a hot sector.
Tbh what value do sales people really add? when I worked at a hedge fund we rarely bothered to speak to them. They set up meetings but were otherwise not a value-add. We had in-house models and dialogue with the companies ourselves. When we wanted another opinion/discussion on key points in a sector we spoke direct to analysts or company management, not sales people. Sales vs research remuneration has more to do with internal politics of banks in my opinion …
spec sales is another matter … those guys and gals were often experienced ex-analysts and were able to offer more frank opinions outside the confines of research notes, which are usually also distributed to the companies … had many interesting communiques from them. But general sales is a total waste of time in my view (well, it was for us). Maybe its different for big long-onlies. Any monkey can pick up a phone.
Any monkey can pick up a phone, you’re right betaadjusted, but they can’t speak. Research is blooming hard work, while sales is easier, more fun and better paid. Who are the mugs? Those that can, research, those that can’t be bothered, sell.
Hah yes. Personally think most sales jobs are acquired via nepotism …
Research can be very interesting but also enormously frustrating and enormously under-appreciated. Yes, you are right, the hours are much worse than sales/trading. The risk/reward is far less attractive which is why many analysts don’t really stick their necks out in research notes: generally if they are right they aren’t rewarded, whereas if they are wrong, they get sacked. And once you are in research its difficult to move to sales/trading despite the obvious benefits that an understanding of a sector might bring to calling clients. This depends on banks, but research is on a different floor.
If you are a big bank like Goldmans with a large market-share in certain areas of the market you don’t need strong research which is why, on average, they don’t (they have had some great analysts although the people I used to speak to have all left, seemingly to bigger and better things). But most people really do as idea generation generates volume. Maybe less so in a raging bull market but today its more necessary.
Never seen a bteetr post! ICOCBW