The New York Times published an article yesterday by Andrew Ross Sorkin (“Analyzing Wall Street’s Research”) detailing Frank P. Quattrone’s statements at the AlwaysOn conference in California. At the conference, Quattrone offered his distaste for Eliot Spitzer’s Global Settlement, making the argument that it has hurt small cap business and dulled the competitiveness of these companies in the US financial markets.
In the end, Quattrone would like a repeal of the settlement but would still expect to see disclosure of banking / research conflict.
Quattrone’s argument is quite compelling (and self-serving). After all, it doesn’t really matter if research and investment banking sleep under the same roof – the key to keeping it rewarding to the industry is through disclosure. Even with the Global Settlement, we are not working in a conflict-free world, thus the purpose of the settlement remains terribly unresolved even though its aftermath is still being felt by the small cap. The fact remains that there is still enough space in the market for everyone – independent research providers continue to clearly add value.
Better disclosure at investment banks benefits the industry greatly, and might be the answer we’ve been looking for. In our opinion, if you want to distribute conflicted research, it should run with an asterisk that discloses that conflict. Certainly, this would be more conducive than putting asterisks next to Barry Bonds’ home run record. If you want to play ball, play by set of rules.
That would be fair, right? Investment banks should be held to such expectations. Disclose your conflict, play ball; in a park with rules where disclosure terms are fair, there’s enough room for all the players.
There will always be an audience for independent research. If the investment banks distribute research with proper disclosure, then Quattrone’s right – there’s no reason not to tear down the wall.
Showing posts with label Sell-Side and Buy-Side. Show all posts
Showing posts with label Sell-Side and Buy-Side. Show all posts
Wednesday, August 13, 2008
Thursday, May 1, 2008
Farewell to Desk Jockeys: Show Me The Money!
The era of desk jockeys seems to be coming to a close as institutional investors push research providers to go far beyond critiquing company earnings and writing up ratings based on quarterly estimates. With a struggling economy breathing down their necks, investors are putting the pressure on analysts to show them the money and give them the edge. But what’s really changing? Can the research world adapt?
Some might argue that independent research providers (IRPs) have been waiting a long time for this opportunity to shine and truly show how their value stacks up against their Wall Street brethren.
Bloomberg News recently published an article by Peter Robison (“What’s Analyst Worth, Not a Penny as Estimates Miss”) which discussed how Wall Street analysts were missing estimates based on a trend of inaccuracy and anti-sell mentality. The problem for those analysts is unfortunately often well outside of their control, and rather dictated by their firms and compliance rules – they are expected to sit at their desks and write, and to ‘fill in’ a research report template. These strangle-held analysts are seldom able to think outside of the box or to expand the scope of their analysis to include information that can set their research apart from their Wall Street competitors. This scenario presents tremendous opportunity for independent analysts who deliver insights that “fall through the cracks” in the Wall Street research silos.
Most independent analysts know that sifting through earnings reports, judging company profiles and keeping an eye on trends is only the bare minimum – a starting point. While waiting on GE earnings, you might find a Wall Street analyst locked up to the point that he’s flicking the top of his Dwight Schrute bobble-head and running his eyes to a rearview monitor mirror every time a coworker passes by.
On the flip side, you’d find an independent analyst walking the factory floors, speaking to government officials, competitors, customers, and any and all sources able to pave the way to the most actionable investment insight. These analysts acquire unique credibility in their sector while always delivering more to their clients.
“Necessary Evil”
Obviously, those who consider analysts a “necessary evil” have never had the kind of relationship that they should be having with their analysts. Reading that, it would seem as though receiving potentially profitable information is a chore. Cut the cord – if you’re not happy, then you should only need to take the trash out once. If an analyst doesn’t show you the money, then it’s probably time to show him the door.
Some might argue that independent research providers (IRPs) have been waiting a long time for this opportunity to shine and truly show how their value stacks up against their Wall Street brethren.
Bloomberg News recently published an article by Peter Robison (“What’s Analyst Worth, Not a Penny as Estimates Miss”) which discussed how Wall Street analysts were missing estimates based on a trend of inaccuracy and anti-sell mentality. The problem for those analysts is unfortunately often well outside of their control, and rather dictated by their firms and compliance rules – they are expected to sit at their desks and write, and to ‘fill in’ a research report template. These strangle-held analysts are seldom able to think outside of the box or to expand the scope of their analysis to include information that can set their research apart from their Wall Street competitors. This scenario presents tremendous opportunity for independent analysts who deliver insights that “fall through the cracks” in the Wall Street research silos.
Most independent analysts know that sifting through earnings reports, judging company profiles and keeping an eye on trends is only the bare minimum – a starting point. While waiting on GE earnings, you might find a Wall Street analyst locked up to the point that he’s flicking the top of his Dwight Schrute bobble-head and running his eyes to a rearview monitor mirror every time a coworker passes by.
On the flip side, you’d find an independent analyst walking the factory floors, speaking to government officials, competitors, customers, and any and all sources able to pave the way to the most actionable investment insight. These analysts acquire unique credibility in their sector while always delivering more to their clients.
“Necessary Evil”
Obviously, those who consider analysts a “necessary evil” have never had the kind of relationship that they should be having with their analysts. Reading that, it would seem as though receiving potentially profitable information is a chore. Cut the cord – if you’re not happy, then you should only need to take the trash out once. If an analyst doesn’t show you the money, then it’s probably time to show him the door.
Tuesday, April 15, 2008
'Best' Can Get Better
Information is all about the source. Can brokerage-house analysts offer conflict-free insights? Even if so, is commoditized investment information ever great?
Navigating information is an art – having vision, critical. David McCullough shouldn’t need to travel through time to know what the air smelled like in Philadelphia in 1776. McCullough, a titan in his field, relies on the scripts of yesterday to produce truly great texts filled with unique, personal knowledge – information with vision. McCullough doesn’t want to write about something that most people already feel or understand. He doesn’t want his unique insight to be compromised or labeled inconsequential. Who would? Breadth and depth require the kind of independence and personality that is in short supply.
As indicated in a recent Barron’s article by Robin Goldwyn Blumenthal, “Sell-Side Story: Analyst Calls Ring Up Best Returns,” a new study from Goizueta Business School at Emory University showed that investors using brokerage-house research are likely to see higher returns than if they were to follow institutional and mutual funds. This sounds counterintuitive when you look at some of the year-end reports from ’07 that show Wall Street research had only 7% ‘Sell’ ratings, collectively, in a down market.
Are these analysts providing the ‘edge’ that investors want? Are investors outperforming their peers based on this commoditized and sanitized information?
‘Conflict-free’ and ‘exclusivity’: two terms which are not parts of a brokerage-house analyst’s vision. Yet, these two characteristics are the very traits that set great information apart from good information, ultimately providing the edge.
Investors can, and should, expect to receive actionable insights that provide them with an advantage over their competitors. The best information is surely not the kind that is universally accessible. There is a better way than the best way; the greater value is in preferred value. Institutional investors need to separate themselves from the masses to gain an edge in the marketplace. Limited distribution of information should be an integral part of the process for investors looking for that edge.
Most models are tragically flawed, leaving investors with more questions than actionable trade ideas. Street Brains offers the edge that investors are looking for – exclusive, unfettered, uncompromised insights. With the right vision, the best returns mean edging out your competitors. While an interesting barometer for the marketplace, the findings of the Goizueta study are a bellwether for mediocrity, not greatness. Valuable investment insight must conquer two key goals: beat market/sector averages and set investors apart from the pack.
Navigating information is an art – having vision, critical. David McCullough shouldn’t need to travel through time to know what the air smelled like in Philadelphia in 1776. McCullough, a titan in his field, relies on the scripts of yesterday to produce truly great texts filled with unique, personal knowledge – information with vision. McCullough doesn’t want to write about something that most people already feel or understand. He doesn’t want his unique insight to be compromised or labeled inconsequential. Who would? Breadth and depth require the kind of independence and personality that is in short supply.
As indicated in a recent Barron’s article by Robin Goldwyn Blumenthal, “Sell-Side Story: Analyst Calls Ring Up Best Returns,” a new study from Goizueta Business School at Emory University showed that investors using brokerage-house research are likely to see higher returns than if they were to follow institutional and mutual funds. This sounds counterintuitive when you look at some of the year-end reports from ’07 that show Wall Street research had only 7% ‘Sell’ ratings, collectively, in a down market.
Are these analysts providing the ‘edge’ that investors want? Are investors outperforming their peers based on this commoditized and sanitized information?
‘Conflict-free’ and ‘exclusivity’: two terms which are not parts of a brokerage-house analyst’s vision. Yet, these two characteristics are the very traits that set great information apart from good information, ultimately providing the edge.
Investors can, and should, expect to receive actionable insights that provide them with an advantage over their competitors. The best information is surely not the kind that is universally accessible. There is a better way than the best way; the greater value is in preferred value. Institutional investors need to separate themselves from the masses to gain an edge in the marketplace. Limited distribution of information should be an integral part of the process for investors looking for that edge.
Most models are tragically flawed, leaving investors with more questions than actionable trade ideas. Street Brains offers the edge that investors are looking for – exclusive, unfettered, uncompromised insights. With the right vision, the best returns mean edging out your competitors. While an interesting barometer for the marketplace, the findings of the Goizueta study are a bellwether for mediocrity, not greatness. Valuable investment insight must conquer two key goals: beat market/sector averages and set investors apart from the pack.
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