Greenwich: Shrinking Bulge

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New York – Greenwich Associates released a report yesterday on US equity research market share indicating that bulge firms have lost share to mid-sized brokers and sector specialists.  While we continue to carp about Greenwich’s methodology, the top line results show shifting share among the bulge firms, as well as an overall loss of share from the larger firms to the smaller.

Winners & Losers

According to Greenwich, the top research firms based on share are Banc of America Merrill Lynch, J.P. Morgan, Barclays, Citi, Credit Suisse and Sanford Bernstein (tied with Credit Suisse for fifth).  Although Banc of America Merrill Lynch and J.P. Morgan were ranked #1 and #2 overall, their share declined.  J.P. Morgan’s share, as calculated by Greenwich, dropped the furthest from 15.5% to 11%.   This is surprising given how well J.P. Morgan has been performing during and post-crisis, so it is likely that Greenwich combined Bear Stearns’ market share with JPM in the prior year numbers.  A more accurate accounting would have JPM going from low share in 2008 to #2 in 2009.

The other winners and losers from Bear’s demise are more clearly laid out.  Among the most highly ranked firms by Greenwich, Banc of America Merrill Lynch and Citi lost share, while Barclay’s, Credit Suisse, and Sanford Bernstein gained share.  The rise of Barclays, which according to Greenwich grew from 7.6% to 7.8%, is remarkable given the bankruptcy of Lehman.  Barclays has aggressively moved to increase its equity staffing globally, so we expect this trend to continue.  Credit Suisse’s share grew from 6.2% to 6.8% and the biggest winner was Sanford Bernstein, which grew from 5.5% to 6.8%, tying CS for fifth.

Shrinking Bulge

According to Greenwich’s release, the overall share of bulge firms dropped from 73% to 68.5%. “That decline reversed a two-year trend in which the bulge bracket had increased its share,” says Greenwich Associates consultant Jay Bennett.  Mid-sized broker/dealers, regional firms and sector specialists increased to approximately 29% in 2009 from about 24% in 2008, according to Greenwich.

The Greenwich survey was conducted between November 2008 and March 2009, and included interviews with 863 buy-side analysts located in the U.S.  Participants were asked to identify their 5 to 10 most important research sources.   Greenwich then weighted those results based on the amount of U.S. equity trade commissions that the individual institutions pay to the named providers. These totals were then aggregated to rank U.S. equity research providers on an overall basis.

Flaws in Greenwich’s Approach

We’ve tried this technique in some of our own surveys, and it has problems.  The biggest issue is that it is biased toward the largest players which offer the broadest level of research services (which also tend to be the purchasers of Greenwich’s surveys).  Smaller firms don’t get mentioned when analysts are asked for the 5-10 most important sources and yet they can in aggregate have significant share of analysts’ spend.

Given the survey’s bias toward larger firms, the findings that mid-sized firms, regionals and sector specialists gained share is even more remarkable.  If the survey were based on actual spending, it would probably show even greater share erosion from bulge firms.  This is not to say we are predicting the demise of bulge firms.  Quite the contrary, we expect that there will always be a cadre of firms that offer a full set of research services and broad coverage.  There will, however be fewer of them, and it will be increasingly difficult for them to maintain the levels of payments they received in past years.  As we have noted in previous blogs, the distinction between bulge firms and mid-sized firms is getting increasing blurred and fragmented.

The Little Guys

The long tail gets short shrift in Greenwich’s survey, primary because of the way they conduct their survey.  This is aggravated by the tendency of hedge funds not to share their favorite niche research sources.  According to Greenwich, the share of independent providers remained flat to just slightly higher at about 2.7% from 2008 to 2009.  This is odd since Greenwich calculates Sanford Bernstein’s share at 6.8% alone.  What do they consider Berstein?  Last we checked, the definition of independent research firms was firms which did not offer investment banking.  If Greenwich classifies firms based on their share, then the whole calculation is somewhat circular.

Although Greenwich’s results are suspect for smaller firms, we think it is reasonably accurate for the larger firms.  As such, the latest results show shifting dynamics within the bulge bracket and confirm the growing diversification into the mid-tier and smaller firms.

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