How does the buy side utilize sell side research?

How is equity research utilized by people in AM/hedge funds etc? 

Who do you choose what firm/analyst to buy research, do you buy research wholly from one firm or do you pick and choose based on the analyst and purchase research from multiple firms?

Curious. I am interviewing for ER associate roles and would like some insight on the whole process of buying research from the buy side perspective 

Comments (4)

trying_my_best, what's your opinion? Comment below:

So i asked this question to my team during my SS ER internship at a MM. Few pointers off the top of my head:

1) Want to start by asking if you are interviewing for sell side roles and why do u think having insight from the buyside perspective will give u a leg up

2) So for the most part, the buyside doesnt care about sell-side's target prices. Few reasons for that:

  1. Target price valuation is a huge art anyway. We can't trust even the best analyst in the world's valuation because the inputs are highly subjective to personal assumptions and interpretation. To me, valuation is like judging the hotness of a girl - we take other people's opinion on how hot a girl is and that can definitely guide us but we can't know until we see for ourselves. Anyway, got off-topic here
  2. Its the buyside's own job to figure out the target price. All the buyside wants from the sellside is to help them understand the company and competitive landscape. They make up their own mind on whether to invest (because investing has such a wide methodology, so in a way the BS is just 'outsourcing' the competitive analysis part to the SS). If they took the SS's target price and rationale for investing, it would reflect very badly on the BS firm
  3. I've come to believe that, 'conviction' is the biggest differentiator between BS and SS. That final conviction of whether to invest or not, and the conviction of the target price, differentiates an actual investor and an outside advisor. The SS doesnt do that 'conviction' - the BS does

3) The buyside relies non-trivially on the sellside for idea generation. A lot of small to mid-caps are not on a lot of PMs' radar, PMs are way too busy monitoring their own huge portfolios. BS analysts spend most of their time researching their own stocks, leaving little time for idea generation. At my firm, the director of research spent a lot of time on idea generation and spitted those ideas onto the team to pitch to clients/ buyside. Importantly, the local stock exchange also regularly pitted us with low-volume stocks and asked us to potentially pitch them to the BS (plus release our regular public coverage) in an effort to encourage interest

4) In some cases, the BS doesnt rely on SS houses purely for the research. At my bank for example, the BS were mostly using my bank's brokerage/ trading service to start with, so they used our research along the way. It's not a secret that traditional ER is becoming more and more of a cost centre too, so this business practice reflects that. More and more funds have their own internal research teams; SS research has been struggling to stay relevant. SS research used to be FO in investment banks 10 years ago - these days u would struggle to justify that

  • Summer Associate in PE - Other

Was Summer Intern at a UMM PE which regularly targets public companies. We used equity research primarily as a information source. Especially initiation of coverage reports are a solid source to understand the business, drivers, etc. Obviously other resources were used as well, but these reports + some quarterly updates to understand recent valuation drivers were an important first source when a new idea comes up. The valuation itself, however, was usually neglected

Dominic Toretto, what's your opinion? Comment below:

SS is useful to know where consensus numbers are and how they are modeling things. e.g. sell side isn't modeling this pricing dynamic, or is assuming margins will do x whereas I think y will happen because of xyz. Helps discover where you have a differentiated view which can lead to alpha.

SS also useful to understand where sentiment is on a name and what KPIs or other metrics investors are focusing on.

Colossotron, what's your opinion? Comment below:

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