The Death Of Equity Research Hasn’t Been Greatly Exaggerated

From my vantage point, the career prospects for Equity Research analysts look dismal. The decade-long shift from active to passive management isn’t new, but it appears to be reaching a tipping point as seen in the rash of announcements from high-profile buy-side and sell-side firms closing their doors, merging or outsourcing to bots.
I’m not sure if we should be more troubled by the fact that so little is being done within our industry to fix the problem or by the lack of acknowledgement there even is a problem. I don’t claim to have all the answers, but I can see one major dilemma leading to our demise. Clients are asked to pay 1%-2% active management fees because ‘Research is in our DNA’ and ‘Research defines us and distinguishes our firm’ (direct quotes from sell-side and buy-side marketing content) and yet I find over 80% of analysts are relying almost entirely on company management for their financial forecasts (or relying on the sell-side, who too often rely primarily on company guidance).
How can we tell our clients we can consistently beat passive indexes if everyone is using company guidance to drive our collective thought process? There are thousands of buy-side firms that pay $1,000 to $10,000 to take a single meeting with company management during non-deal roadshows and yet most of these firms don’t have a budget or a process to rigorously develop an independent view for the stocks being researched. Moreover, I find too many analysts ‘covering’ well over 50 stocks, stretched too thin to consistently derive out-of-consensus insights.
The simple truth is if we’re going to ask clients to pay us 1%-2% of AUM for ‘excess’ or ‘abnormal’ returns, we need to spend an excessive amount of time seeking insights from abnormal sources (not just company management and the sell-side).

This post was published at Zero Hedge on Jul 24, 2017.