Equity research is changing. The looming spectre of MiFID II, which stipulates that the buy-side must separate out the money it pays for research from other fees it pays investment banks, has increased demand for seasoned analysts able to produce meaty analysis.
However, the bloodbath of analysts in recent years has also meant that the supply of experienced equity researchers has declined and investment banks’ teams are getting ever-younger.
In a piece of research by consultants Accenture on the changing dynamics of equity research, one portfolio manager of a multi-billion dollar fund said, “the average age and experience of sell-side analysts goes down every year. They are getting younger and younger without any real, long-term industry experience or insight.”
The banks have themselves to blame for the shortage of sought-after talent, of course. Equity research has been offshored and jobs were annihilated after the financial crisis – the number of analysts have halved to 9,000 since 2007, according to analysis by Edison Investment Research.
Meanwhile, experienced analysts, disillusioned by the lack of creativity and pressures to ‘churn out’ research in order to encourage more trading activity from clients, have moved on to start their own firms.
“It’s just not the industry it once was,” says one former head of auto research at a French bank who started their own research boutique. “It’s always been a relatively flat structure, but the financial crisis has led to a lack of appreciation of experience in research from investment banks and they’re turning to cheaper, junior staff.”
There have been numerous examples if the incompatability of seasoned equity researchers and large investment banks. Last year, David Knox, the former head of research at J.P. Morgan and later CEO of Oriel Securities, started his own research boutique Lazarus Partnership and hired a number of senior analysts from J.P. Morgan, UBS and Oriel. It now has 15 employees.
Meanwhile, Andy Howard, the former head of Goldman Sachs’ GS Sustain research product, now runs his own firm Didas Research, while Marietta Miemietz, former head of pharmaceutical research at SocGen, heads up her own boutique Primavenues.
Nonetheless, senior research hires continue. In recent weeks UBS has hired James van Tassel as a managing director and deputy head of research for EMEA, while Morgan Stanley hired Ben Maslen, the co-head of capital good research at Bank of America Merrill Lynch.
The typical structure of a research team now, suggest headhunters, is two “high profile senior people” and “five mediocre juniors”.
Still, the implications of MiFID II could cause more casualties. A number of the 60 people laid off by Nomura earlier this week worked in research functions – albeit on the fixed income side of the business.
As Financial News points out, Nomura specifically cited MiFID II as one of the reasons for the cuts and other investment banks may have to make similar structural changes to their research functions.
Research is expensive - Accenture cites a (very old) report into the cost of equity research carried out by Sanford C. Berstein in 2004. The top eight investment banks spent $200-300m from 2000-2003 on research, all of which was paid for by investment banking fees.