At this time last year, directors of U.S. fixed-income research were cheering the first signs of life in a market that only a few months earlier had seemed so toxic, many wondered if it would ever see growth again. In recent months, however, those green shoots have withered. A dearth of securitized products, fears of sovereign-wealth crises spreading and a sluggish U.S. economic recovery have spooked many fixed-income investors.
“What took us by surprise was the strength of the negative reaction to events in Europe this spring and the degree to which economic data has softened more recently,” says Peter Hooper III, chief U.S. economist for Deutsche Bank in New York.
In response to the bad news at home and abroad, “investors who’ve traditionally had more of a U.S. and developed-market focus have had to think more about investing in emerging markets,” explains Joyce Chang, New York–based global head of J.P. Morgan’s credit research department and director of its emerging-markets coverage.
This shift in focus has prompted many banks to reconsider their approaches to U.S. fixed-income research, and money managers say no firm does a better job of meeting their changing needs than J.P. Morgan, which rises one rung to claim top honors in the 2010 All-America Fixed-Income Research Team survey.
J.P. Morgan captures a record 55 team positions — 13 more than it won last year, including seven more first-place positions — and bumps down to second place the research department that had ruled the roost for the past decade, last year as part of Barclays Capital and for the nine years before that as part of Lehman Brothers. (Barclays acquired the North American operations of Lehman Brothers Holdings in September 2008.) BarCap wins 49 total team positions this year, three more than in 2009 and up two from the previous record high of 47 it won in 2008.
BofA Merrill Lynch Global Research holds steady in third place even though it picks up six more positions, for a total of 40. Returning in fourth and fifth place, respectively, are Goldman, Sachs & Co., with 24 positions (two more than in 2009), and Wells Fargo Securities, with 15 (one more than last year). Results are based on responses from more than 1,100 buy-side analysts and investment officers at approximately 440 firms managing an estimated $8.9 trillion in U.S. fixed-income assets.
Terrence Belton, global head of fixed-income strategy at J.P. Morgan, also notes that investors are taking a broader view these days. “The global linkages are more pronounced this year than in the last couple of years,” says Belton, who is based in Chicago and leads the top-ranked team in Interest Rate Derivatives and, with Srinivasan Ramaswamy, the No. 1 team in General Strategy. (Analysts and teams ranked No. 1 in their respective sectors and the complete list of winners, including those ranked second, third and runner-up, click here.) “We’ve benefited a lot from the global nature of our franchise and our research team,” Belton adds.
Other firms are beefing up their global fixed-income franchises. BarCap hired Michael Gavin, formerly an emerging-markets economist with Citadel Investment Group, in August 2009 to direct its emerging-markets strategy; the firm also added analysts in Brazil and Russia to cover those burgeoning fixed-income markets, according to Laurence Kantor, global head of research in New York.
BofA Merrill restructured its research operations last year, consolidating all 30 of its emerging-markets fixed-income analysts into one team, to “intensify the generation of ideas and grow the dialogue across regions,” according to Michael Maras, the bank’s New York–based head of global credit and emerging-markets fixed-income research.
“In emerging markets we were primarily focused in equities — we were lacking on the fixed-income side,” Maras acknowledges. “The message we got from clients was, ‘You need to create a brand identity in that space and educate us.’”
J.P. Morgan’s Chang, who with Luis Oganes leads the top-ranked teams in Emerging-Markets Strategy and Emerging-Markets Sovereigns & Economics, attributes rising interest in emerging markets at least in part to a decline in structured securities and other instruments that appeal to risk-averse investors (see “Structured Market Ready to Grow, But ...”). J.P. Morgan estimates that the overall supply of credit products has dropped by $1.2 trillion since 2007, to $2.7 trillion, and net issuance of structured products in the first half of 2010 was $174 billion less than it was in the same period last year.