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Ask five heads of some of the top U.S. sell-side research firms to turn their gaze to their own industry, and you’ll get what you came for: thoughtful, considered views on the state of American research, including how these research heads are meeting buy-side clients’ needs amid an ever-evolving competitive landscape.
But even these minds — who think critically for a living, while managing and developing large teams of individual analysts who do the same — had to take a breath when reflecting on 2023.
“Have you ever paid a mortgage with an interest rate higher than 5 percent?” asks Daire Browne, head of U.S. equity research at BofA Securities, wryly adding that his first mortgage, taken in 2005, clocked in at 8.3 percent. Five days after our interview, the average rate for a 30-year loan had reportedly hit 8 percent — the highest level since August 2000. “That’s what’s changed,” Browne continues. “We have been in a unique year in which inflation peaked. We didn’t get the recession that everybody expected, yet rates kept going higher and higher. And if you had a floating-rate mortgage, you really felt it.”
It was a volatile year, notes Michelle Teitsch, director of Americas equity research at Morgan Stanley. “The world has been undergoing major geopolitical and also technological transformations in addition to grappling with inflation and rising interest rates,” she says. “It’s during times like these that I feel that sell-side research has the biggest opportunity to produce meaningful insights for our investors and to help them navigate the uncertain times effectively.”
Although this year has indeed been a turbulent one, “that volatility, as well as an ongoing softening in the primary issuance market, has led to increased demand from our clients for our insights,” says Nicholas Rosato, head of North America equity research at JPMorgan Chase, pointing out that though some IPOs have come to market in the past six months, activity remains well below the “torrid” pace of 2020 and 2021.
Along with the unprecedented rate environment, it was crucial to be aware of the industry- and stock-level trends occurring in parallel. “From the perspective of my department and the research teams that I manage, it was critically important to stay up on all of the macro,” Browne explains. “But you did not want to get strongly oriented on one single macro view. If you did, there was a great chance you were going to miss some of the company specifics and industry themes that were really driving the market.”
According to the results of Institutional Investor’s 52nd All-America Research Team, there was little missed by these top firms: BofA Securities is the new No. 1 in this year’s annual ranking of Wall Street’s best research providers. With 49 team positions, the firm bumps last year’s winner, JPMorgan, down to second place, with 46. Morgan Stanley places a close third, with 44 positions, and Evercore ISI maintains its fourth-place finish, with 37. Jefferies — with the biggest increase in positions, from 21 to 31 — continues its climb up the leaderboard, moving up one rung to round out the top five. Wolfe Research drops one spot, to sixth, and Wells Fargo Securities, one of the most improved providers in the survey, jumps up three places to capture seventh and tie with UBS.
Like 2022, this was a year when smaller, independent investment banks and boutique organizations continued to advance up the standings. Michael Eastwood, U.S. director of research for Jefferies, credits his firm’s rise to the investments it has made over the past decade and a commitment to producing high-quality content.
“If I go back to 2010, we had one ranked II analyst across Europe and the United States,” notes Eastwood, who has been with the bank for 12 years. “Now we have 58 — 25 in Europe and 33 in the U.S. We’re a top stock-picking department — being able to actually add alpha to your customer’s process is good — and we’ve grown our coverage in both the U.S. and globally alongside our sales business.” Eastwood says that 40 percent of the stocks Jefferies covers are overseen by people who started there as associates, most out of college.
“That kind of thing is certainly gratifying, to develop talent,” he continues. “We don’t just buy talent; we seek to grow and to build analysts. And we build them, I believe, quite effectively.”
This aggressive expansion dovetailed coincidentally with the introduction of the Markets in Financial Instruments Directive, which unbundled research from trading, forcing asset managers to change how they bought investment research. It was “a very good thing for a firm like ours,” Eastwood says. “We entered MiFID with a greater ability to negotiate. We had something more that people wanted.”
This market has put clients under a tremendous amount of pressure, observes Chris Ferrara, co-head of equity advisory for Wells Fargo, which has evolved its equity research offering. “The sell side can sometimes be too academic and lose sight of the challenges our clients are facing,” he notes. “We constantly challenge ourselves to think more like our clients think. That means a tighter focus on key debates, more tactical ideas, and just generally being where they need us to be.” Additionally, Ferrara reports that the firm made some key strategic hires from the buy side this year.
The movement up the leaderboard has not gone unnoticed by the larger, global firms further up. “We’re starting to see resilience in the midtier of research providers,” says BofA’s Browne. “Bulge-bracket firms like ours have continued to be strong and grow market share, so I’m really happy with that, but I’m also happy for the industry in that I’m seeing these middle-tier players continue to grow and provide great research, and we want that. We want a vibrant marketplace for research. We want the usage of research to be important and to continue to grow.”
There will be one less bulge-bracket firm in the AART standings after the mid-March approval of UBS’s acquisition of Credit Suisse in a deal orchestrated by the Swiss government and the European Securities and Markets Authority. However, although the deal officially closed in June, the unification of the two firms is still underway, and both make the AART leaderboard this year (UBS ties for No. 7 and Credit Suisse ties for 15th).
“When you have two large research firms coming together, it’s a very disruptive process and it can take multiple years before it comes together,” asserts one industry observer. “As the saying goes: ‘You storm, you norm, and then you perform.’ The storm is where they are right now, but I can also see to the very end of this and say that the combined entity is going to be a real competitor, more so than either of the other two firms. But that’s not going to happen overnight.”
Even for firms not going through a major acquisition, there were obstacles unrelated to market forces. “The biggest challenge we had was restoring our in-office culture after several years in lockdown during the pandemic,” says BofA’s Browne. “Research is very much an apprenticeship culture, and we pride ourselves in BofA Global Research on having an excellent culture where learning is a focus. Collaboration across a very broad department, if it’s done right, drives a unique and differentiated product. And for us coming out of the pandemic, some of that suffered. There’s no doubt about it that you cannot collaborate or teach through glass.”
This sentiment has been echoed at several other firms, regardless of size. “March 2020 was not a great time, nor was the year after it,” Jefferies’s Eastwood allows. “Running our business from our living rooms was a curious sensation. But I think that we have emerged from it with a very strong team, and one which probably understands the value of face-to-face interactions, not just with each other, but with our customers as well.”
Says BofA’s Browne: “Senior, experienced, tenured analysts, they can survive in that environment for a period of time. But juniors underneath them are not learning, developing, experiencing what it’s like to be in front of clients face-to-face, providing advice, receiving feedback real-time. All of that gets incredibly difficult when you’re remote.”
BofA made a huge effort earlier this year to get people to return to the office. “I’m proud to say that at this point we are fully back, and we’re back to what things were like in 2019, in both in-office culture as well as our client engagement,” Browne says.
At JPMorgan, employees have been in person three to five days a week since April, and Rosato says the firm trains its talent on an ongoing basis. “We still have many professionals who have been doing this for more than a decade, and in some cases multiple decades,” he explains. “When we do have opportunities open up, we try and leverage our up-and-coming talent. We have a deep bench and a long and proud history of promoting from within.”
Morgan Stanley’s Teitsch points out that, in addition to mentoring, one of the benefits of being back in the office is the organic interactions that lead to collaborations across research sectors. “We have such a strong culture of collaboration at Morgan Stanley,” she says. “A lot of it is planned, but there’s a lot of chance collaboration that occurs when talking to someone about the markets, and that is much easier to achieve in the office.”
U.S. research directors have also turned their attention to the rapidly developing space of generative AI — technology that, though still in its infancy, looks set to impact nearly all sectors that sell-side firms cover.
“I really feel we need to be in the forefront of educating our clients on the far-reaching impacts of AI, machine learning, large language models, and how that’s going to impact all of the sectors we cover,” says Browne. “It’s a much bigger scope of impact than just looking at the technology industry and how it’s being disrupted.”
This includes the sell-side research industry itself in terms of tools and processes for analysts. When this writer half-seriously questions whether ChatGPT will be conducting these interviews next year, BofA’s Browne is characteristically reflective in his reply: “We’re in the same boat in that we both create ideas for a living,” he says. “And there is no generative AI that I have seen, and I’ve spent a lot of time looking at it, that can replace what you do or what my analysts do, so I think you and I will still be in business for a while.”
What AI can change is search and discovery — what is created will get found much faster than ever before, which is a key difference and can increase productivity for analysts. “Much work has been done on AI and building the internal tools to leverage it while ensuring we are protecting our internal data,” says JPMorgan’s Rosato. “I think this technology will be a useful tool to drive efficiencies and productivity.”
Morgan Stanley has a strategic partnership with OpenAI, which is now powering an internal chatbot that gives financial advisers speedy access to Morgan Stanley’s research and other proprietary content. Teitsch reports that the research department has been investing in AI for more than a decade and is looking into use cases for generative AI that can “enhance the value that we provide clients by enabling our analysts to spend a materially higher percentage of time creating and connecting dots and providing insights.”
Jefferies’ Eastwood shares his blunt assessment: “The way that we think about large language models is relatively simple: They can predict the next word, but they cannot yet innovate. Yet.”
It’s not that different from the internet, which could have killed multiple businesses but didn’t, he adds. “Going back ten, 25 years, the big difference between what I used to do as an associate and what these analysts do now was no internet, no cell phones,” he says. “You had to actually do the work, and call people and read books and read magazines and fax people. And, to an extent, technology has made the job much more effective purely by making information ubiquitous and democratized.”
Technologies like generative AI and large language models are just one of the unique themes that have driven the market this year. What are the others? And how have analysts added value amid this turbulence? Read on to find out.
