Sell-Side Research = 0 Value?
I got a lot of negative comments a few weeks ago when I introduced the idea that the sell side industry as a whole is dying. As I continue to put together my research on this topic, I wanted to get the broader audience consensus regarding sell-side research.
Keeping in mind that I work as a sell-side research associate, my initial thought is that the job does add no value. If I'm a buy-side firm, I would rather have my own research team (which many do now), to ensure unbiased research and do a 'deep dive' into a company or sector that is more comprehensive than typical sell-side bullsh*t.
From a sell-side perspective, if I'm IB, I don't care what my research team is doing because we've got a Chinese Wall between us and I'm looking to do deals one way or another. ST is really the only place that I see value...and that value is really only to keep sales people employed so that they have something to talk to for clients (and from above I think clients are going to go to them less and less).
So...does sell-side research add any value..to anyone?
I work in a mining focused deal team at a specialist bank. Our bank's sell-side research desk is a good marketing tool for us in that it provides referrals and adds to our reputation. However the type of analysis required for equity investors is almost useless from a balance sheet lending perspective.
Maybe useful to certain high net worth individuals, and some reports are bs, but some I do find quite well written.
Obvious answer: if it's good research it provides value, otherwise no.
A few things to keep in mind sport... A lot of buy-side shops are relatively small and don't have the manpower to do deep dives on every name they would be interested in. Its much easier to pick up the phone and call an analyst that you like to get a model, get the download on the company and get a sense for where investors are positioned. Along those lines, somebody like Capital Research doesn't need anybody's help getting a meeting with management. But that $1B hedge fund probably does. So when XYZ bank has the CFO of ABC Co. in town, that $1B hedge fund appreciates having XYZ bank bring Mr. CFO through and pays for that kind of access. Finally I'll point out that a good analyst should be in the flow of whats happening in the industry and with the companies he covers, and can be a good source for general sentiment, which way the winds blowing, etc.
As a new associate you probably don't see much more than the models you're working on or the notes you help write. And there's not much value there. Once you actually start talking to people, investors and management teams, you'll have a better opinion of what this job really is. If there was no value here then I'd have a lot more free time throughout the day without constantly getting calls and e-mails from our buy-side clients.
I believe research analysts do provide value on the whole. Of course, this is circumstantial and there should be some nuance here, but I'd highlight the following broader aspects to support the case that research analysts (at least, an ideal research analyst) provide value:
1 Primary research - several fund managers and other large investors, who are research clients, aren't able (from a resource or cost perspective) to carry out the in-depth level of research that a high quality research team should be doing, when appropriate. At least not on a larger universe of companies that a research community investigates. This due diligence can often be valuable to investors in firming aspects of their investment process.
2 Corporate access - research analysts are able to use their own and firm's credibility to get access to CEOs and Management teams that several fund managers and other large investors may not have such ease of access to. They also may organise tours of company facilities and more in-depth discussions with various management personnel. Some investors will value this, and sure, others less so.
3 In-depth knowledge - research analysts have spent years focusing on particular companies and industries so have developed a valuable knowledge base and perspective for their analysis.
4 Management accountability - analysts will spend time questioning companies on aspects of their strategy, questionable accounting reports, etc. So as a community, analysts (along with investors, of course) play a part in driving greater management accountability.
However, having said all of the above, there are buy-side investors that do have an internal research team, as mentioned in previous posts, and they will be carrying their own style of investment due diligence. So admittedly for some, there is less demand for research than other investors.
Final point I'd make is, if the consistently top-rated analyst in a sector announced a buy or sell on a company, and that recommendation was different to general consensus, then you might at least be interested in knowing the story behind that. If, however, one of many analysts on a company initiates with a buy, which is consensus, then you'd be less likely to want to look into that.
Depends on what side you're coming from but corporate access and 1-on-1's, I would think, are quite useful. The primers and quick education hits can be helpful if you're just picking up a sector.
But if anything I would say sell-side just provides some checks, balances, and other views to research you should have already done (Assuming you're coming from buy-side).
From a PE perspective they can add at least some value during an IB bake-off process. For example, if I know GS has the top-rated mining analyst that may weigh on my decision to select GS IB as a participant in an IPO process as I know that they GS ER will likely initiate relatively positive coverage on my newly public portfolio company and provide us with deep industry knowledge. ER research can also provide a sanity check for modelling assumptions and allow you to identify areas where the consensus/herd is wrong.
Haha so you're implying that the Chinese Wall at GS isn't very thick?
Whenever I hear someone say "Chinese Wall", I say you are a fucking liar.
when companies decide to go to the market how do you think they select which banks to give the deal to? This is where sell side ER adds the most value. You think they will give a banking deal to a bank with a 'sell' out on the company's stock? The deals go to the firms that have had consistent buy recommendations out on the stock and have built up relationships through the ER team.
Thank you for your topics. It is very impressed that you are saying no value for the sell-side research because I think the research analysts are so import for IB. So why there is value of the buy-side research? And I don't understand what do you mean by the Chinese wall between us?
i do not know about ER but in rates and FX space i find some research to be interesting but in general i think the research biz is going more and more toward independent shops where you pay for quality stuff on its own merit rather then as part of a bank's offering to encourage trading.
I agree, but the consensual herd mentality among sell-side FX and rates strategists is absolutely revolting at times. I guess you could also use their 'forecasts' as a contra-indicator to see what's being overpriced into a market, but overall I get sick of reading the exact commentaries and identical trade ideas over and over again regardless of the bank. Most of their outlook also tends to be an after the fact extrapolation of past events/ expectations opposed to forward looking insight. Maybe I'm just extremely bitter due to wasting the last 7h reading reports while gaining little actionable information.
From the perspective of an investor, sell-side ER reports are practically useless. They don't offer much in terms of actual analysis. I'm amazed that those analysts get paid so much.
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