How Jefferies’ Investment Research Leapfrogged Competitors

The bank has stolen market share from others and made an “unprecedented” jump in the rankings of research providers.

Bloomberg/Angus Mordant

Bloomberg/Angus Mordant

When the European Union’s MiFID II became effective in January 2018 and unbundled trading commissions and investment research, investors started paying more attention to the respective bills for those services. Since then, one bank’s research business has thrived during the tougher environment, hiring aggressively and leapfrogging competitors in industry leaderboards.

Last year, Jefferies was the biggest mover on Institutional Investor’s All-America Research Team, climbing from tenth place to No. 6 on the annual ranking of Wall Street’s top research providers, as voted on by clients. And the bank has similarly improved in the latest investment research rankings by Substantive Research, which provides research analytics to buy-side professionals.

JP Morgan and Morgan Stanley maintained the top two positions in the Substantive Research ranking, which is based on a broker’s research pricing, supply, and market share.

Jefferies ranked third in 2022, up from seventh place in 2021, an “unprecedented” jump, Mike Carrodus, founder and CEO at Substantive Research, said.

Bulge-bracket banks dominate the top of the sell-side rankings every year and command, on average, a majority of investors’ research budgets. They are good at what they do and the names are fairly entrenched in their places, according to Carrodus.

“Every step up is harder and much bigger,” Carrodus said. “As you get further near the top, to move even one place is such an enormous success, in terms of changing how people value and perceive your research.”

Cost pressure from MiFID II and lower buy-side budgets for research because of the market environment caused many research businesses to maintain the status quo or shrink in recent years. Jefferies, however, has continued to aggressively invest in its research. Even when the occasional senior analyst has left, Jefferies has replaced them with comparable talent, instead of less experienced analysts, according to Carrodus. Investors are worried about that “juniorization” — a term Carrodus said he frequently hears investors use to describe the practice.

“There might be a 27-year-old rockstar [analyst], but it’s really nice to have someone who’s been through a couple of cycles,” Carrodus said.

Some teams have shrunk at Jefferies, Carrodus said, but in proportionate terms, and the bank hasn’t lost nearly the experience that competitors have. Jefferies’ net experience lost between 2019 and the first half of 2022 was 70 percent lower than the top ten research providers, and 80 percent lower than their peers in the top five, according to Substantive Research.

But Jefferies hasn’t risen in the rankings solely because of its activity since MiFID II. The recent success reflected in industry rankings has been a decade in the making, Michael Eastwood, U.S. director of research at Jefferies, said.

Ten years ago, Jefferies was covering about 900 U.S. stocks. But it has added to its headcount and now covers more than 1,300 in the U.S. and 3,000 globally. The breadth is differentiating the firm. Some people are surprised to learn that the bank has the largest small mid-cap coverage in the world.

And although it has hired many over the years, 40 percent of the analysts at Jefferies began their career at the firm and the average analyst tenure is 15 years — metrics that beat the ones at competitors, Eastwood said.

Jefferies has also invested in its alternative data and maintained strong offerings in addition to its research on individual stocks.

“We have an extraordinarily strong macro offering,” Eastwood said. ”We have the best-read global strategist in the world in Chris Wood [global head of equity strategy at Jefferies]. We have the go-to chief market strategist for the Fed, David Zervos.”

But Jefferies isn’t resting on its laurels.

“One of the great skills of being a research analyst is paranoia. I am keenly aware of my competitors. There are those who have dropped by the wayside. But there are also those who have built up at the same time as we have. You have a number of very strong large banks who I think will continue to produce research, but I believe that we have senior tenured analysts and that’s our strength,” Eastwood said.

“This is a long-term business which we have committed to. I believe that equity research is a very important part of any investment bank’s product offering.”