Demise of the Sell-Side?
For years now, it has felt as if sell-side analysts were leaving their firms in droves…some moving to the buy-side, others to corporate positions as CFOs or investor relations officers, and still others to destinations unknown. A recent Financial Times (FT) article corroborated this “feeling,” reporting that the number of investment bank research analysts has fallen by one-tenth since 2012. According to the article, these cuts are expected to continue. Vontobel Asset Management’s chief investment officer said in the article, “we will have massive cost pressures in an industry that is not ready for it at all…they’ll have to gut things pretty hard.”
Back in the day of the dot.com bubble (when I was director of investor relations for an internet search firm), claims of biased research ran rampant. In fact, an analyst following my company was directly implicated, and I saw first-hand how new rules and regulations were needed to ensure sell-side coverage was not influenced by outside factors. Next came the financial crisis, when “newly cost-conscious banks started slashing staffing of research departments, because they made little direct contribution to earnings,” said the Financial Times.
Additional changes are underfoot, according to the president and CEO of Westminster Research as told to FlexTrade Systems. “The emergence of new research products has been largely data driven.” Whereas in the past, analysts were generally responsible for covering a specific industry and stock, and reporting findings back to its clients, asset managers are now taking the data, “and interpreting it, making their own assumptions and coming up with their own ideas and create alpha.”
Sarah Gordon, business editor at FT, said in a recent article that, “most analysts’ research is not very good.” She goes on to say that, “if greater transparency has not forced analysts to do a better job, other mechanisms must be tried. Alternatively, the demise of sell-side research should be quietly celebrated.” On the other hand, Stuart Kirk, a Deutsche Bank analyst, believes we should “expect a renaissance in research now things are heating up again,” according to a recent FT article. Kirk says his expectation is based on increased research report readership, meeting requests and phone calls. He claims that demand for research more than “doubles during periods of uncertainty such as Brexit or Donald Trump’s election victory.”
What does all of this mean for investor relations departments? Certainly, attracting research coverage has never been easy, with no silver bullet to expand the number of analysts covering your company. While it does not seem likely to get any easier with fewer analysts working with fewer resources, there remains considerable benefit to having sell-side support for your company.
Laurie Berman, lberman@pondel.com
