Indies Remain Popular with Buy-Side, but…


New York, NY – Despite the difficult market environment experienced by many independent research firms in 2011, institutional investors continue to find these boutique providers to be extremely valuable.  This view is based on the results of the 2011 All America Research Team announced by Institutional Investor Magazine in the fourth quarter of last year.  However, could recent market dynamics change these trends?

2011 AART Results

As you can see from the table below (click the table for a larger version), analysts at US independent research firms garnered twenty three (23) All-America Research Team (AART) rankings in 2011, a modest decline from the 26 seen in 2010, but slightly higher than the 20 analysts ranked in 2009.  In addition, analysts at 10 different independent research providers received II rankings in 2011, a slight drop from 2010 when analysts at 13 firms were ranked on the All-America Research Team.

Two independent research firms received II rankings for the first time in 2011, including Buckingham Research Group and Renaissance Macro Research.  Buckingham Research has been in existence for over 29 years, whereas Renaissance Macro is a new firm founded by well-known analyst Jeff DeGraff.

It is a little strange that five established independent research firms that received II rankings in 2010 did not obtain them in 2011.  These firms include Satya Pradhuman’s Cirrus Research, Bill Pecoriello’s Consumer Edge Research, Jim Furey’s Furey Research, Jeff Sprague’s Vertical Research Partners, and well-known Potomac Research.  This might reflect that boutique nature of these firms and their limited institutional sales resources rather than the popularity of their research with buy-side investors.

Longer-Term Trends Show Growing Acceptance

While independent research firms clearly experienced a modest dip in the number of analysts and firms that earned All-America Research Team rankings in 2011, it is still too early to tell if this performance reflects a change in the importance of boutique research to the buy-side’s research process.

Over the longer term we think Institutional Investor’s annual AART rankings reflect the growing acceptance of indie research by the buy-side.  For example, in 2000 only three independent research firms received a total of 12 II rankings (including ISI, Sanford Bernstein, and Schwab Washington Research Group).  This changed dramatically over the next ten years, so that by 2010, thirteen different independent research boutiques captured 26 II rankings (not including Sanford Bernstein who now provides investment banking services).

Could this Trend Reverse?

One of the reasons for the growing acceptance of independent research by the buy-side has been the willingness of well-known analysts to leave the sell-side and start their own indie research firms.  Certainly that has been the case over the past decade with former sell-side analysts Michelle Applebaum, Michael Goldstein, Dana Telsey, Ivy Zelman, Ed Wolfe, Satya Pradhuman, Jim Furey, Bill Pecoriello, Jeff Spague, and Jeff DeGraff establishing successful independent research firms.

Unfortunately, the extremely difficult market environment that many independent research firms have faced over the past few years could reverse analysts’ interest in leaving the sell-side and establishing their own independent research boutiques in the future.  Even worse, some independent analysts may look to move back to the sell-side.

While we have not seen any recent data to support this fear, it certainly warrants investigating.  One factor which could mitigate this development is the fact that many sell-side firms have experienced their own difficulties over the past few years.  In fact, we would not be surprised if shrinking Wall Street bonuses and recently announced layoffs don’t reduce the ranks of sell-side analysts in the coming months.  This could lead some analysts to consider joining independent research firms as an employment alternative.




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