NEW YORK, NY--(Marketwired - Oct 6, 2016) - Long live sell-side research, according to Institutional Investor's 2016 All-America Research Team. The 45th anniversary of the annual ranking of Wall Street's top equity analysts begs the question: Why does the buy side still buy sell-side research?
Since May Day 1975, when 180 years of fixed brokerage commissions ended on Wall Street, prognosticators have insisted that sell-side equity research's days were numbered, and doom-and-gloomers saw the relationship between sell-side research and buy-side investing as imperiled.
And yet year after year, the sell side has proven surprisingly resilient. Nicholas Rosato, head of North American Research for JPMorgan, argues that for all the fears and fluctuations, what has not changed over the decades is the mutually beneficial relationship with the buy side.
"The buy side continues to need and value sell-side research," Rosato affirms.
Institutional Investor launched the All-America Research Team ranking in 1972, three years before May Day. The ranking's longevity is evidence of the ability of sell-side research to evolve, adjust and change.
"The Institutional Investor All-America Research poll continues to set the standard to identify excellence within the Investment Research ecosystem," says Will Rowlands-Rees, Managing Director of II Research. "This year we saw voters in particular really focus on the Economics/Strategy sectors, with a material increase in overall voting. With an uncertain global macro environment, this doesn't surprise. It just reinforces the continued importance of this process to provide actionable product feedback between Buy and Sell side," he adds.
The team is the buy side's judgment on the performance of its outsourced providers of investment analysis; it's an election, not a stock-picking contest.
And this year's election has a new victor. JPMorgan had held top honors for five consecutive years, until Bank of America Merrill Lynch edged ahead of it last year. This year, JPMorgan regains its crown with 40 analysts voted on the team -- an improvement of four over 2015 -- beating out BofA Merrill, which saw its total fall by six, to 32.
Rounding out this year's top ten firms:
1. J.P. Morgan
2. Bank of America Merrill Lynch
3. Evercore ISI
5. Morgan Stanley
7. Sanford C. Bernstein & Co.
8. Deutsche Bank Securities
9. RBC Capital Markets
In all, this year's team includes 322 analysts from 30 firms. To see the full team, including all ranked firms and analysts, visit www.institutionalinvestor.com/aart.
Among the investment trends uncovered by this year's results:
- In a topsy-turvy year, investors turned to top firms. Eight out of the top ten firms saw their numbers rise, notably Evercore ISI, from 25 to 30, and UBS, from 22 to 28. That was not the case in 2015, but it may suggest that in a topsy-turvy year, investors turned to the top firms, which tend to be larger and more diversified.
- When it's quality over quantity, JPMorgan is king. The weighted average paints a different picture than the overall leaderboard. This measure gives greater credence to getting higher-ranked analysts voted onto the team. JPMorgan runs away with the weighted average, as it has for a number of years, in which a rating of four is assigned to each first-place position, three to each second-place spot, and so on. The bank racks up 109 points to the No. 2 shop, Evercore ISI, with 79. BofA Merrill slides to fourth this year, with a weighted average of 59.
- A volatile year led to movement in the ranks by weighted average. Evercore ISI rises from No. 3 in 2015 to No. 2, while UBS hops three spots from No. 6 to No. 3. On weighted average, however, four firms -- UBS, BofA Merrill, Bernstein and Morgan Stanley, both based in New York -- come out neck and neck, with only five points separating No. 3, UBS, and No. 5, Morgan Stanley.
- Many of the favorite stocks of 2015 fell from favor in 2016. This year's market was one in which much of the gains were coming from a narrowing universe of stocks. An active, value-oriented stock-picker's market -- the kind sell-side research traditionally served -- shifted to big-cap, dividend, share-buyback or defensive plays as the year unfolded. U.S. stock markets profited from investors globally seeking yield, but as Brian Hodess, who runs Bank of America Merrill Lynch's U.S. research effort, says, more than half of fund managers still believe the market is overvalued.
- A complex set of macroeconomic factors forced sell-side researchers to collaborate. "Brexit, the ECB, the Fed, the Bank of Japan, China -- all have played into an approach of mixing macro research and stock research," says Vinayak Singh, a member of Evercore ISI's executive, management and investment committee. "That requires a tremendous amount of collaboration." At the very least, this kind of research throws up barriers of entry to smaller research shops lacking scale, reach and financial resources. Evercore's Singh talks about talent migration to the bigger firms and consolidation of the sell side. The evidence for that may be in the greater concentration of ranked analysts among the top-ten firms.
- As it has since 1975, the question of who will pay for sell-side research looms. In Europe, a much-discussed regulatory policy known as Markets in Financial Instruments Directives II (MIFID II) mandates that research be unbundled from commissions, among many other changes, looks like it will finally be implemented on January 2018. U.S. research is not immune. The major firms have European clients and clients that do business on the Continent. The effect? There's some debate about that, but clearly true unbundling will encourage firms to support individual analysts over entire groups, or some firms over others. "If you're in a middle tier, and you don't have products of excellence, you could lose sales," says David Adelman, the director of Morgan Stanley's Americas equity research group. That's slowly occurring anyway in the U.S., he adds, "as clients concentrate their research vote."
The 2016 All-America Research Team survey results reflect the opinions of some 3,835 individuals at 1,090 firms, including more than 90 of the 100 biggest U.S. equity managers. Our respondents manage an estimated $11.57 trillion in U.S. equities.
For full ranking results, analysis and methodology, visit www.institutionalinvestor.com/aart.
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