Some Sell-Side Talent Slipping Away


New York, NY – According to a recent press release, UBS’ well-known cable, satellite and entertainment analyst, Aryeh Bourkoff, has been named vice chairman of UBS Technology, Media and Telecommunication’s Investment Banking unit, effective May 1.

Bourkoff was unique in that he covered both the debt and equity sides and he currently serves as head of the media and communications sector research.  Bourkoff joined UBS in 1999. Prior to that, Bourkoff was a senior high yield analyst covering cable and satellite companies for CIBC World Markets.

Over the past seven years, Bourkoff has been named a top ranked fixed-income analyst in the cable and & satellite sector by Institutional Investor magazine. In 2005, Bourkoff was the first analyst to achieve the No. 1 ranking in his sector for Equity, Fixed Income and Hedge Fund Institutional Investor surveys in the same year.  Bourkoff was also recently named to the Wall Street Journal ‘s annual “Best on The Street” equity analyst rankings for stock picking, receiving the top spot in the “Broadcasting and Entertainment” category.

While Bourkoff’s move from research to investment banking is in no ways unusual, it could be seen as just another example of the drain of analytical experience and talent that has plagued the sell-side in the wake of the Global Research Analyst Settlement.  In addition, the heavy legal and compliance burden that research analysts have to face today has made the job of sell-side analysts much less enjoyable (and less lucrative) than it was in years past.

This has led a number of prominent sell-side analysts to leave the protection of major Wall Street investment banks to start or join boutique alternative research shops, including Richard Kramer (formerly executive director and European technology analyst at Goldman Sachs in London), Michelle Applebaum (formerly II ranked steel analyst at Salomon Brothers), Louise Yamada (II ranked technical analyst at Smith Barney), Dana Telsey (II ranked retail analyst at Bear Stearns), Jeff DeGraaf (Lehman Brothers chief technical analyst), and Francois Trahan (II ranked portfolio strategist at Bear Stearns).

Consequently, some buy-side investors have complained that the industry insight included in many sell-side research reports has suffered due to the loss in experienced analysts — one factor that has led some to value sell-side research less today than they did in the past.

Of course, over the past five years the sell-side has been struggling with getting its research costs under control, while still producing a research product that institutional accounts will pay for.  As a result, many firms have been experimenting with various products and models to generate “must have” research services for both traditional long only asset managers and the burgeoning hedge fund community.

Comment by Bill George:
This article does a very good job of outliningg why there has been a trend of highly decorated sell-side analysts leaving the the sell-side, or taking jobs outside of research and analysis, within sell-side brokerage firms.

I call this trend “The Dangerfield Effect” because I believe new awareness in the environment makes it harder for sell-side analysts to get the respect they typically received before late 2000.

For those who might be interested in reviewing other details that have contributed to “The Dangerfield Effect”, I’m copying and pasting the text of a speech that Attorney General of New York State Eliot Spitzer delivered at the Institutional Investor Awards Presentation Dinner in November of 2002.

Below the text of this speech I have copied and pasted the URL to an SEC ‘Fact Sheet’ describing the Global Research Analyst Settlement. (To access this “Fact Sheet” this URL can be copied and pasted into your browser’s address line). I believe the information in these documents provides additional insight into why sell-side analysts might be modifying their career paths.

Institutional Investor Dinner, November 12, 2002 by Eliot Spitzer, NYS Attorney General

Thank you for that introduction. I’m sorry that I am speaking so late in the evening . . .

I am grateful for the opportunity to be here tonight. My continuing dialogue with the investment community is important. It allows me to learn what you are thinking, and provides me with the opportunity to explain our continued efforts to reform and bring transparency to the industry.

I also hope that my being here tonight conveys to you that although I am a critic of certain industry practices, I am not a critic of the analyst profession.

Tonight’s program is devoted to the celebration of individual achievement. At the same time, we must also recognize that there has been industry-wide failure.

For at least the last several years, analysts have labored in a corporate structure that placed undue or improper pressure on them. Too often, they were asked to tailor their investment advice to further investment banking interests, even if that was in conflict with their obligation to provide honest, objective advice.

The revelations of these past few months have shown how certain analysts succumbed to that pressure. The public’s attention has been drawn to several particularly gripping examples of the conflict — of analysts who privately derided as dogs — and worse — stocks that they were touting to the public.

We are now also all aware that the structural problems ran much deeper than that. Because analyst compensation was tied to the ability to assist in or generate investment banking business, there was a strong incentive to act as promoters of the deal and not arbiters of quality.

Some in the industry offer investor greed, wide-eyed optimism and a herd mentality rather than misleading research to explain the losses investors have experienced. These apologists might admit to distortions, but never dishonesty. But to be frank about it, the advice provided to investors was often dishonest.

It was dishonest because small investors were advised to buy stocks that the analyst believed they never should have owned, and told to hold stocks that they long ago should have sold.

All this has been widely disclosed and discussed this past year. Solutions to some of these problems may be in the offing. I’d like to spend the next few minutes discussing another area in which there is a structural flaw which again highlights the need for inquiry, oversight and reform.

As I noted at the outset, we are here tonight to recognize individual achievement. It is therefore important to understand the achievement that is being assessed and awarded.

These are the institutional investor awards, and thus reflect criteria important to institutional investors, who prize analysts’ accessibility, their insights and their ability to uncover a valuable piece of information about a company or sector, and their access to management.

What these awards do not measure is the performance of analysts’ buy, sell and hold recommendations.
I am not here to question those criteria used by institutional investors or to challenge their application. But since my focus has been on protecting individual investors, I want to call attention to the industry’s use of these awards, which is in need of reform.

Although tonight’s all-stars are named by and for institutional investors, the brokerage houses tout these awards to the investing public together with the analysts’ stock recommendations.
The message being broadcast to individual investors by linking the awards to stock picking is deceptively simple: follow the “smart” or “professional” institutional money and act on these recommendations. That message is simply deceptive.

It implies that tonight’s awards measure the performance of the buy, sell and hold recommendations offered. In fact, tonight’s awards do no such thing. Those in attendance tonight already know this. But the investing public is not aware that the awards don’t reflect the performance of your stock recommendations.

At the request of my office, a company by the name of Investars has analyzed the recommendations of more than four hundred past and present institutional investor all-star analysts in 51 industries for which there were Dow Jones equivalents.

Investars measured the performance of the recommendations made in the twelve months prior to an analyst being named to the all-star team. They also measured the performance of competing analysts not named to the team. In all, 110,000 analyst recommendations were reviewed.

The results are in, and they’re telling. In many instances, those named to the all-star team are turning in lackluster performances. The advice of analysts not chosen would very often have been more profitable to individual investors than the advice of all-star team members.

Let me be clear: this does not mean that the analysts honored here tonight all performed poorly, or that they do not deserve their awards. Some performed quite well, and based on the criteria employed by those who voted, you are all indeed all-stars. But it does mean that it is inappropriate for your employers to cite these awards when touting your buy, sell and hold recommendations to individual investors.

There is no need for me to go into great detail about the specifics of Investars’ results. Here are some of the highlights:
1. When measured by the performance of their stock recommendations, only one of this year’s 51 first team all-stars included in the study ranked first in their sector.
2. When measured by the performance of their stock recommendations, only one of the more than 100 members of the 2000 and 2001 first team all-stars included in their study ranked first in their sector.
3. When measured by the performance of their stock recommendations, only 16 of 51 of this year’s first team all-stars are in their sector’s top 5. That is an improvement over last year, when only 10 of 51 first team all-stars studied cracked the top 5. In 2000, only 13 of 51 made the top 5.
4. More than 40% of this year’s first team all-stars did not perform as well as the average analyst for their sector. The same is true of the 2000 and 2001 first team all-stars whose performance was reviewed.
Investars ran several checks to ensure that their methodology was not biased against big firm analysts.
5. In fact, their results indicate that 40% of tonight’s first team all-stars underperformed when measured against the average performance of other big firm analysts covering their sector. 20 of the 2002 first team all-stars whose performance was reviewed performed below their sector’s average for big firm analysts; 23 of the 51 2001 first team members Investars reviewed performed below the average of their colleagues at big firms, and 21 of 51 of the 2000 first team all-stars in the study similarly underperformed.
6. Moreover, 25 of the 51 members of this year’s first team were outperformed by at least one of their runners-up named to the second or third team, and half of the 2000 and 2001 first team all-stars reviewed were bested by their runners-up.
Frankly, what is more troubling than the performance of the stock picks of some of the all-star analysts is the lack of transparency about that performance. When we first attempted to gather this data ourselves, we encountered significant obstacles — and we have certain data gathering advantages over the individual investor.

For an industry that prides itself on trading in — and relying upon — information, it was surprisingly difficult for us to gather the data necessary to objectively measure analyst performance. The brokerage houses make the data available on a proprietary basis to companies that repackage and resell that data. Acquiring that data is far beyond the means of individual investors.

Even if one can afford the data, it is sold with restrictions that prohibit using it to make objective performance measurements available to individual investors. Investars was only able to conduct their study because they have painstakingly constructed a database of stock recommendations by compiling them one-by-one from sources in the public domain.

That has got to change. After spending hundreds of hours listening to investment banks and their lawyers lecture about the efficiency of the marketplace, I’m still disappointed to learn that they withhold from the market the data necessary to allow it to perform efficiently.
The problem that I have outlined is two-fold: banks use the institutional investor all-star designations to improperly convey to individual investors that their analysts’ stock picking has garnered awards. Moreover, the data necessary for investors to objectively measure an analyst’s stock-picking performance is being withheld from the market.

The solution is to require all recommendations to be provided to a publicly available database maintained by the S.E.C. or another regulatory authority ninety days after they are issued. The banks should also make available all the historical recommendation data necessary to conduct performance-based measurements.
This will allow the banks to maintain their practice of providing the recommendations to their customers on a proprietary basis while also allowing the investing public and others to measure the historical performance of the analysts’ buy, sell and hold recommendations.

I believe that achieving this transparency should be an element of any global resolution that is negotiated with the industry. Industry leaders have been claiming for several months now that they favor transparency. If they do, this is an easy first step.

Some in the audience and in the industry will undoubtedly object to the release of this data and to the performance measurements that will follow. You should recognize that the movement toward transparency is not only inevitable, it is also in your interest.

More than twenty-five years ago, A.G. Becker started conducting performance based measurements for your buy-side colleagues, ranking their returns, and comparing those returns to the S&P 500.

The rankings have brought faith — and extraordinary investment — to that industry. The weakest performers are penalized, but that is how the market should operate. Over all, the industry has gained. Bringing transparency to sell-side analysts will bring similar benefits to your industry.

Another benefit of transparency will be its use as a tool to resist investment bankers who would still want you to push the stocks they’re underwriting. Once your performance is objectively measured , you will be more easily able to argue to your investment banking colleagues that you must protect that performance and not sacrifice it to satisfy banking clients.

Some analysts are undoubtedly concerned because the reforms proposed and implemented to date may lead to decreases in their compensation. They will question why their buy, sell and hold recommendations should be publicly evaluated if the performance of those recommendations does not determine their compensation.

My response to them is simple: if you don’t want to stand behind your recommendations, don’t make them available to retail investors. But recognize the potential benefits of transparency: once there are performance based measurements made publicly available, there can be no doubt that banks will compete for — and generously compensate — proven stock-picking talent.

I said earlier that I am a critic of certain industry-wide practices and abuses, but not of the analyst profession. If you think that my words here tonight sound harsh, take a moment to compare my approach to those of some of the industry’s defenders.

Alan Abelson and Michael Lewis — two supposedly staunch advocates for the banks and the market — both have written that there is no need for regulation because every investor ought to recognize that analyst stock recommendations are useless — and useless is their word, not mine.

Billion-dollar mutual fund conglomerates have been built in the past quarter-century on the theory that individuals who want to invest in the stock market should ignore analyst recommendations and simply purchase index funds.

While I’m not ready to dispute that advice — which has served many investors well — I don’t agree with Lewis and others that the product of your labors is useless. At least it doesn’t have to be. But to restore investor confidence – in the markets, in the investment banks and in the integrity of your recommendations – you need to regain the trust of the investing public.

I am not a proponent of government intervention in markets, unless there is strong evidence of market failure. But reform is now clearly necessary in the brokerage industry.

The experts can debate and individual investors can decide whether stock picking is preferable to investing in index funds. Government should not and can not tell investors how to invest their savings.

But government can not sit idly by when banks are deceptively marketing dishonest advice to investors — whether by pushing stocks that they do not genuinely believe in or by using these all-star awards as a false proxy for stock-picking performance.
My own efforts are guided by a confidence in the positive effect that transparency will have on the industry. The industry’s efforts to reform itself should be guided by that same confidence.
Investors may sometimes act unwisely, in haste or out of greed. But those impulses do not excuse the industry from its obligation to provide investors with conflict-free advice, and do not relieve the banks of their obligation to allow investors to assess the performance of the analysts on whom they are being asked to rely.

The investing public is understandably leery of the industry right now. The lack of transparency and the absence of accountability to retail investors heightened the distrust that developed when the industry’s abuses were exposed.

Because trust is so slowly accumulated, the process of restoring it is a lengthy one.

The best way to restore that trust quickly is to adopt the proposed reforms and to implement systems that allow for transparency. Taken together, they can serve as a bridge over the chasm of distrust separating the investing public from the brokerage industry.

I look forward to working together with the industry to achieve the necessary restructuring, adopt the necessary reforms and regain the public’s trust.

For more on information on the Global Analyst Research Settlement see link.


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