Jon Moulton, titan of the private equity industry, well-known critic of finance’s sacred cows and not a man known for biting his tongue, thinks that equity researchers are going to have to start working for a living sometime soon.
It’s worth pointing out the obvious here: a man who works in an industry involved in taking companies private is unlikely to be an advocate of the public equity markets. Nevertheless, Moulton seems to be onto something.
The equity research model is not really viable. Research is a cost centre, not a profit centre for banks. This in itself might be enough to smash the research business, and it’s not the only hammer hovering overhead.
The equity market outlook is poor. Equity markets aren’t rising any more. It's harder to hide bad trade ideas behind increasing index levels. Most of the developed world is facing stagflation, and the large investors, like billion dollar pension funds and others, haven’t crossed the Rubicon yet to allow them to invest big sums in the emerging market equities which are still seeing some prospects for strong growth. This translates into poor conditions for the equities divisions of the big banks. Volumes are falling, and so are commissions.
At the same time, the nature of equity research is changing and so are the kinds of people required to do it.
In order to be successful as a researcher you’ve always needed to be extremely analytical with immense attention to detail. Now, you’ll also need to be a people person. You’ll need to get out there and meet the management of the companies you cover and you’ll need to persuade them to give you information that will differentiate your research from every other piece on the market. And you’ll need to meet investors. Increasingly nowadays, researchers are being asked to market their own product. The days of researchers sitting in ivory towers are long gone.
If you want to get into equity research you’ll therefore need a rare and contradictory set of traits: irrational optimism about the future of research, but realism about the future of companies; and immense nerdiness combined with extreme charisma. Is this you? If so, apply. If not, don’t bother.