Pros and Cons of Centralized Research Structure

What are the pros and cons of the centralized research structure, where the analysts don't belong to a specific team (employed by the likes of Thornburg, NB, etc.)? The cons are slightly more obvious, but any insights would be appreciated.

 

Wouldn't you say that it's a decent role (if at a quality shop) if you are more interested in understanding the business than allocating capital?

Would an analyst in a centralized pool also responsible for "idea generation" on top of coverage?

 
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Happy to provide some pros (worked in the model at one point):

1) At some (most?) firms, central research analysts run a research fund with capital in their sector. So they are generating a track-record and enjoy the autonomy of holding their career in their own hands.

2) In general, central research allows for more specialization. Some folks like their industry almost as much as investing and would rather be an “oil & gas” guy than a pure, generalist investor. Some (myself included) think it is easier to generate alpha with specific sector expertise. There is also a component of your career that involves building/managing relationships in sector-  those can really compound over time and show up later in life as board seats, seed funding for a startup fund, etc. 

3) Relatedly, it is *much* easier to hop to industry as an exit opp if you are industry focused. This is obvious but hard to underappreciate- generalist investing does not relate well to any other work, careers are long and the typical way one leaves generalist investing is sustained underperformance- which can make staying in investing difficult and require a pretty major life adjustment. I know PMs from my last firm who were fired at 50 and basically never worked again- vs. analysts who hopped to senior IR/strategy roles and will probably spend their next few decades as high performing CFOs of public companies if they want to. 

4) In general, I think the PM/analyst distinction is overwrought. Both have high quality of life, but PMs are rarely in the weeds on businesses- so if you enjoy that, you won’t necessarily enjoy life as much after the jump. 
 

Now, to the sell-side question:

1) At least pre-pandemic, the sell-side was incredibly travel heavy- pounding the pavement to meet clients, companies, etc. 

2) Even at the biggest research shops, the client base is realistically 25-30 PMs per sector and the power dynamic is much more in the analyst’s favor- emails can be responded to in a day or two vs. immediately, etc. That’s another huge quality of life difference. 
 

3) There is more intellectual honesty on the buy side and less institutional pressure.

4) There’s more time to do deep, insightful research. 

5) In general you can build any relationship a sell-side analyst could (management team, investing peer, etc.) but with no pressure if you don’t want to. Sell-side analysts spend tons of time with the pod shops- you don’t have to.
 

On the flip side, some advantages to being on the sell-side:

1) Having a team of 2-3 younger people underneath you is great leverage. It is frankly a total mystery to me why big LOs don’t adopt some version of this model- most analysts don’t have any direct support.

2) Personal branding is obviously easier as a sell-side analyst and yes, you are effectively paid to network. 
 

3) This cuts both ways, but one reason folks prefer being an industry analyst in central research vs. PM-track is that it is less performance based over time. That doesn’t mean they aren’t confident- just aware of the vissitudes of a shrinking industry. Being a sell-side analyst is an even more pure version of that- with relationships and a personal brand there is enormous job security- and in a deal-heavy sector that can turn into a very lucrative place to be.

TL;DR buy side central research is sell side research for introverts with a preference for intellectual purity who fancy themselves more as a (highly paid) professor of an industry than a social butterfly.

 

Typically in central research you'll do some combination of writing notes, trading your sleeve of the research fund(s), stock pitches (organized presentations on a name you like) and 1x1 meetings with PMs either in person ("walking the halls") or over Zoom. 

I'd highlight that there's a big difference here vs. other areas of the industry- typically, LO PMs are running 50-100 name portfolios, so they are much more likely to take any given analyst recommendation than a single manager hedge fund PM running a more concentrated book.

At least in my experience, there was also a way of tracking whether PMs agreed or disagreed with your recs- always a tough one (i.e. if your sleeve outperformed, by the funds didn't benefit much, some process is broken- whether it is the PMs' fault or the analyst's fault is something for research management to diagnose). 

As to the degree to which they care- that depends on your sector, its scale/relevance to their benchmark, how punchy your idea seems to be, your internal reputation, etc. In general, I'd say they do- it's pretty rare for an analyst to really push an idea and not see it get into portfolios in some size at least. Remember LOs are a little sleepier than the rest of the industry and true passion for an idea is arguably a little less common in an industry where people are paid to cover their sectors and outperform over decades. 

 

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