We attended the New York Society of Securities Analysts (NYSSA) panel discussion on The State of Equity Research last week. The panel was hosted by Richard Lipstein from the Wall St recruiting firm Borden. Joining him were a number of senior research managers from across Wall St: Brett Hodess, Managing Director, Deputy Director of Americas Equity Research, Bank of America Merrill Lynch; Mark Little, Director of U.S. Equity Research at Macquarie Securities (USA) Inc.; Stephen Penwell, Director of the Americas, Equity Research, Morgan Stanley; Jonathan Rosenzweig, Director of Research, Americas, Citigroup; Lara Warner, Director of U.S. Equity Research, Credit Suisse.
Overall the presentation was up beat. Research is in demand driven by the cutbacks of in-house research by the buy-side, increased capital market activity (new issuance), as well as broad recognition by senior management of the importance of research as part of the respective firms’ equity businesses. Many of the firms have gone through dramatic change in the previous 18 months, and they were actively plugging gaps – in some cases poaching from each other, as someone quipped. There was also the view that research related commissions had rebounded and that this had been confirmed in various external surveys.
When asked by Brett what were the major challenges facing research analysts, the answers included: the burgeoning variety of client types (15 or more) and their diverse needs, the need to balance long term and short recommendations, and the need to analyze across the capital structure. The need to “be commercial” was mentioned several times – after all its not worth creating a great piece of research if the analyst fails to communicate the call out to their internal and external constituencies. From a team standpoint, it was all about hiring and growing the talent, and ultimately ensuring that the team generates revenues.
The question of Independent Research was raised. There seemed to be a healthy respect for what one DoR referred to as a now “important part of the food chain”. Some firms had created alternative research offerings as add-ons to their offering, another firm promoted a more multi faceted build, buy or partner approach depending on the situation. Some firms have leverage alternative sources into their own teams to enhance their core product. The common theme was that firms were seeking to embed “new capabilities” around their core fundamental research businesses.
The skeptics suggested that the big firms had huge advantages of scale through global footprint, waterfront coverage, large sales teams and sophisticated product and marketing management. Most big firms now have sector heads, coordinating calls within and across teams leveraging infrastructure simply not available to small fundamental research shops. However, there was recognition that some boutiques were incredibly successful – refreshingly one view was that it was healthy that there was a business model outside the bulge bracket that could support even higher pay for top analysts.
Overall a fascinating presentation which painted a generally rosy picture of the equity research industry.