Outsourcing Equity Research
I'd love to work in equity research, but as a Sophomore in college, how likely is it that equity research will still be around in the US 10 years from now?
I honestly think there is a limit to how much can be outsourced, because analysts need to meet with management of the companies they follow, and I think equity research is another one of those fields where quality and prestige is a lot more valuable than efficiency. People are willing to pay more for equity research from a guy that went to Harvard than Muhammad Akeem Akbar of Pakistan.
Am I wrong in my assumptions?
Communicating with S&T and clients are big in ER. Don't see how a guy halfway around the world can be more efficient doing that
I firmly believe ER will be outsourced, but not to India or the Philippines. Independent US research firms will get a bigger and bigger piece of the pie.
I see that somewhat as well. One very real and unappreciated problem (By wall street types) is the growing credibility gap. The credit agencies have had some very real events occur, such as in 2007, that have negatively damaged the perception of their trustworthiness. The persistent unwillingness of BB firms to rate large clients as "sells" even when a negative assessment is obvious also signals that they value their relationships with the company execs over providing accurate reporting to their investors.
Overall there is a possibility that these trends will push investors towards using more critical equity research that doesn't depend on those relationships(like a lot of MM banks), or independent shops that have a reputation for being willing to negatively punish poor performance/management like Morningstar.
Hell I have consistently had better results from small firms. For my last report SunTrust and KeyBanc blew the larger firms out of the water when it came to helping me build a decent(what turned out to be spot on, actually) forecast model and valuation.
life on the buyside, the website, has an article about the future of ER analysts. He seems pretty optimistic.
Can't have an equity department without research. Firms have tried before and failed miserably.
In my view:
Outsourcing is less of a concern than an evolving business model that may drive big change in the way banks operate their research departments.
Why is outsourcing not a huge threat? Like in baseball, it is hard to control Analysts salaries in ER, as a "big name" Analyst will drive a vastly disproportionate amount of revenue for the bank. This creates challenges for the bank that wishes to outsource ER, as an Analyst will take his clients with him to his new firm.
The implication here is that reducing labor costs through outsourcing will drive an even stronger negative impact on revenue.
That said, given ER is firewalled from IBD, the department is an expensive cost center at a time when banks are scrambling for ways to reduce costs. Going forward I envision the banks moving to new business models that attempt to more directly monetize its research.
I also envision a scenario where research becomes more independent of big banks, where boutiques have expertise in particular sectors and sell that service directly to hedge funds and mutual funds. I also can envision a scenario where Analysts (or banks) try to take their research truly public, using the Internet as a distribution channel for superstar Analysts to monetize millions of customers for much less per customer.
Hedge funds simply do not have the manpower to effectively cover these stocks, so I believe demand for ER skills will persist - although it is questionable how ER will get paid and what these organizations will look like going forward.
Most likely some of the transition will be to independent shops (which is already on-going anyway) and buy-side firms beefing up their own research departments...or maybe what gamenumbers said regarding a new business model of some sort. Offshoring it entirely will not be an option, even though we already have offshore associates they are entirely cut off from sales, clients, trading, banking....everything. Even I get frustrated speaking to them and I can't picture some PM being patient. I also can't picture them trading with that bank if their calls are forwarded to some guy in Mumbai. There is a huge language barrier and a certain lack of quality in their work.
Star analysts will always be in demand as well, not necessarily for their right calls or performance, but simply for their popularity. A well known analyst will definitely bring in business.
You can't outsource the relationships you have with clients, industry contacts, and corporate management - so yes, there is a future for ER if you do become an analyst.
The medial tasks like model updates and writing reports is already being outsourced to a small degree here in Asia (India, China outsourced associates), although the quality is quite poor compared to a native speaker/onshore associate. They still have a long way to go before being "presentable" to clients.
IMO independents only exist as derivatives of sell side shops. Sell side analyst gets tired of the bureaucracy and wants to run things his way, or wants to keep a bigger cut of the revenues he is generating, and has enough of a client following to support a small shop. The problem is research is a business model that REQUIRES scale, and if the new analysts coming on board at independents can't build meaningful followings, the business runs out of steam. Good luck building any sort of following though without a competent, dedicated sales force, because those buy siders are getting hammered with research from 3,000+ firms every day. Plus, a subset of those 3,000 firms consist of former coworkers, friends, and acquaintances, so your research budget gets spread really thin. So every independent has new analyst blood that is trying to gain traction, and the buy side clients are getting pulled in every direction for a bigger share of their commissions, and there is no way everybody gets a piece.
Bottom line, it remains to be seen whether any of the independent shops can keep going after the primary analyst that brought all the business with him from the sell side leaves/retires/dies. And inevitably that will happen, because revenues and compensation in this industry blow right now, and no founder is going to keep pouring money into a hemorrhaging business; the options will be to shut it down or run a bare bones shop with no ambition of winning business beyond the relationships he started with.
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