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The Best of the Buyside

Analysts at Europe's leading asset managers are enjoying increased demand from hedge funds and an optimistic climate about stocks. The bear market was brutal, but that was a long time ago.

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The portfolio managers at Insight Investment Management had nothing but praise for the firm's in-house research analysts. They admired their colleagues' imagination, discipline and deep industry knowledge. They had just one request: They wanted more boots on the ground.

Last year reinforcements marched in when the £74 billion ($139.5 billion)-in-assets arm of U.K. bank HBOS decided to increase the ranks of its U.K. and pan-European equity analysts, taking the group from 13 to 17. Among the notable hires: Kate Pettem, a former Hermes Pensions Management analyst who follows consumer goods and leisure, and former HSBC Group analyst Russell Wright, who covers construction and building materials companies.

"Research is the foundation of our investment process," says Nick Anderson, Insight's head of research. "Our fund managers have a huge appetite to hear the views of in-house analysts."

Things are looking up for buy-side analysts. Two years of solid market gains -- the MSCI Europe index rose 9.4 percent in local currency terms last year, after gaining 16.5 percent in 2003 -- have begun to dull the memory of the brutal 2000­'02 bear market, when shares plunged 45 percent. In turn, many asset managers are, like Insight, boosting their rosters of in-house researchers.

"In 2004 there was still an overhang from the bear market," says Jeremy Canning, manager of the asset management division at London-based executive search firm Morgan McKinley. He estimates that money management hiring budgets will increase this year by as much as 15 percent, spurred in good measure by the continued growth of hedge fund investing in Europe. "Players that started up three or four years ago and are now doing well will be expanding healthily."

The hiring ranges from the broad-based to the selective. Zurich's Julius Baer Group, a $115 billion asset manager, ended a two-year hiring spree in December, having recruited 17 new equity analysts for a team that now numbers 25. The analyst buildup was part of an effort to centralize the research resources that Julius Baer had deployed in private banking and institutional fund management. "We wanted to increase our stock-picking capability," explains Kevin Lyne-Smith, head of group equity research at the firm.

RCM, part of Allianz Global Investors, hired two new equity analysts for its Frankfurt office to cover the chemical and consumer industries. In January the firm signed up a London-based media analyst, bringing its roster of Europe-based equity analysts to 25. "Good in-house analysts can make all the difference in getting stock selection right and adding to fund performance," says deputy CEO Mark Archer.

This wave of hiring only serves to underscore the growing importance of buy-side research, particularly in the wake of the cuts made by the City and Wall Street. Also, the surge in small-cap stocks has played to the strength of the buy side, as small caps often fall below the radar of sell-siders. Increasingly, asset managers view their in-house research departments as critical sources of alpha, and there is a growing pressure on top buy-side analysts to generate investment ideas that translate into exceptional portfolio performance.

In our fifth annual Best of the Buy Side ranking, Institutional Investor singles out 23 analysts at European asset management firms, for outstanding equity research. To choose this year's group, II polled some 3,600 sell-side analysts who received votes in our 2005 All-Europe and Emerging EMEA research teams and asked them to name the top buy-side researchers in their own investment specialties. More than 770 sell-side analysts responded.

The winners hail mainly from large and long-established money management firms, including Alliance Capital Management (three team members), Crédit Agricole Asset Management (four), and WestAM (two). One toils for a two-year-old hedge fund manager, Tisbury Capital Management; another plies his trade at Universities Superannuation Scheme, the University of Oxford's pension fund. Their extracurricular activities are varied: One analyst has climbed Aconcagua, a 22,834-foot summit in the Andes; another is an animal lover who keeps eight cats.

Though their interests are diverse, most buy-side analysts practice similar approaches. They consider macroeconomic factors that could influence the performance of their stocks, and they burrow deeply into the finances and management of the companies they cover. They talk to customers, competitors and midlevel managers; they analyze obscure cash flow ratios that may reveal hidden problems. As one admiring sell-sider says of Alliance Capital analyst Ian Kirwan, "He casts his net as far as it can go."

Buy-side analysts are enjoying strong demand for their services among firms of all sizes and styles, from long-only value equity managers to rapidly proliferating hedge funds, whose appetite for top researchers is boosting compensation industrywide. In 2004, at both long-only funds and hedge funds, a buy-side analyst with six years' experience earned a basic salary of roughly £80,000, according to Morgan McKinley -- between 5 and 10 percent above 2003 levels. Rising pay is a trend Morgan McKinley noted a year ago and confirmed last November.

When it comes to the bonus, though, the gap between hedge funds and long-only managers can be dramatic. Peter Milne, manager of the investment management group at London executive search firm Robert Walters, estimates that performance bonuses for analysts at hedge funds are about two to three times basic pay in a good year. At the best-paying long-only managers, analyst bonuses are usually equivalent to basic salary. "The pressure has been on traditional asset managers against the flow of people leaving for the alternative-investment sector," says Milne.

No one is looking to repeat the go-go hiring binges of the last bull market, but in the mini­arms race for research talent, hedge funds certainly can deploy the big guns. RAB Capital is a case in point. With assets exploding -- the London-based hedge fund's portfolio shot up by 72 percent last year, to $1.75 billion -- RAB launched a drive that more than doubled its team of investment professionals, from 14 to 29.

In this competitive market buy-side firms are trying to leverage their strengths, one of which is their appetite for small- and midcap stocks. The average small-cap stock is covered by only seven sell-side analysts, compared with 17 to 20 for a large-cap stock.

That's a key reason Belgium-based financial services group Fortis strengthened its small- and midcap expertise last June. Launching a miniraid on Baring Asset Management, Fortis recruited small-company analyst Sam Cosh and three portfolio managers.

"Small caps are underfollowed, and that means there's a good opportunity to discover something that the market does not know," says Emmy Labovitch, a product specialist at Fortis Investments, the E82 billion ($108.7 billion) asset management arm of Fortis. For two consecutive years small-cap stocks have outperformed their large-cap counterparts. In 2004 the MSCI Europe small-cap index jumped 20.4 percent in local currency terms, after a 34.6 percent gain in 2003.

Whether a fundamental analyst covers large caps or small caps, there's no substitute for on-the-ground investigation. Consider the case of Fraser Slater, deputy U.K. equities manager at USS and a first-time Best of the Buy Side winner.

"Last year I met with well over 100 companies," Slater says. "Usually, I have three or four analyst meetings in my office every week."

That's a lot of spadework, but no one doubts that it has paid off.

This feature was compiled under the direction of Director of Research Operations Sathya Rajavelu, Assistant Managing Editor for Research Lewis Knox, Senior Editor Jane B. Kenney and Associate Editor Svetlana Anoschenko with assistance from Researchers Russell Bradley-Cook and Normand Morneau.


Crédit Agricole Asset Management

Metals & Mining, Oil & Gas

Emmanuel Martin likes the give-and-take of a spirited debate. He'll spend an hour on the phone with a sell-side counterpart examining the pros and cons of an investment idea. "This is what you want from a buy-side analyst," says one of his frequent sparring partners. "Who needs someone who agrees with you all the time?"

Few can argue with Martin's judgment on Luxembourg-based steel producer Arcelor, which was created by the February 2002 merger of France's Usinor, Luxembourg's Arbed and Spain's Aceralia. The 42-year-old Martin, who appears for the first time in the Best of the Buy Side ranking, has touted Arcelor since the end of 2003; he's optimistic about the steel market's recovery and ongoing synergies from the merger. In 2004 the shares rose 30 percent, to E17 ($23.20); as of mid-February the stock was at E17.90. The MSCI metals and mining index rose just 12.8 percent last year, gaining a further 11.8 percent through mid-February.

A 1985 graduate of the Ecole Nationale Supérieure de Chimie de Paris, Martin earned a degree from the Institut Français du Pétrole two years later. He spent five years as an analyst on the buy side at Crédit Lyonnais. He joined Crédit Agricole Asset Management, which has roughly E70 billion in European equities under management, in mid-2003.


Deutsche Asset Management


When choosing a company to invest in, there's no substitute for strong corporate leadership, says Susana Peñarrubia Fraguas, a Deutsche Asset Management utilities analyst who makes her debut in our Best of the Buy Side ranking.

"A company might be in a good market," she says, "but if we don't think management has the ability to be successful in reaching their targets, we won't invest."

Peñarrubia, 32, grew up in the Spanish coastal town of Cartagena and in 1995 received a superior degree in economics from the Universidad de Alcalá de Henares in Madrid. After four years spent marketing fixed-income products at Dresdner Kleinwort Wasserstein in Frankfurt and Madrid, Peñarrubia in 2000 joined Deutsche's four-member global utilities team.

She looks first at the fundamentals of supply and demand for electricity in a given country. "You have to understand the market and try to anticipate when the next investment cycle is coming and what the effect will be on electricity pricing," she explains. Peñarrubia also strives to evaluate the quality of a company's earnings, paying particular attention to return on invested capital.

In 2004 the analyst did especially well with E.On, a Düsseldorf-based utility that she recommended at the start of the year largely because she believed the company's management team was underappreciated by investors. The stock gained 46 percent during 2004, well ahead of the MSCI world utilities index's 29 percent return. "E.On is the best example of a company with excellent management," says Peñarrubia. "Their people really know their way around a generator."


AXA Investment Managers

Beverages, Food Producers

In early September, Isabelle Pajot became troubled by rising commodity prices and declining food consumption in much of Europe. The Paris-born analyst, who debuts in our ranking, quickly soured on food stocks and turned to tobacco shares, which she judged to be undervalued. "The pressure was just much greater on food stocks," she recalls. Her bet paid off. Food companies underperformed the Dow Jones Stoxx food and beverages index by about 7 percent through mid-February. During the same period tobacco stocks jumped, besting the Stoxx by about 20 percent.

A music lover with a passion for Italian opera, Pajot, 42, graduated from the Ecole Supérieure de Commerce de Paris in 1984. She has followed food and consumer goods companies as an analyst on both the buy and sell sides.

In the summer of 2000, just as the bear market was getting under way, Pajot joined AXA Investment Managers, which reports E10 billion ($12.9 billion) in European equities under management. She tracks about 60 stocks and closely covers 25 to 30.

In June 2004, Pajot made an especially shrewd call on Belgian beer company Interbrew, which she thought was undervalued. Four months later the company merged with Brazilian brewer Companhia de Bebidas das Américas, a move that was unexpected when Pajot made her recommendation. The combined company, InBev, became Europe's biggest beer manufacturer, and its shares jumped 17 percent from June through mid-February as investors began to appreciate the new brewer's growth prospects.


J.P. Morgan Fleming Asset Management

Telecommunications Equipment

"He isn't contrarian for the sake of being different," says one sell-sider of J.P. Morgan Fleming Asset Management's Christian Pecher. "He becomes contrarian because his meticulous analysis leads him there."

Pecher, 32, heads the European technology team for J.P. Morgan Fleming, which manages $100 billion in European equities. This year marks his third consecutive appearance in the Best of the Buy Side ranking. The German-born Pecher earned his undergraduate degree in economics from the University of London. After receiving a master's degree in science from the London School of Economics and Political Science in 1998, he took a job at J.P. Morgan Investment Management as a technology analyst. What does he look for in a company? "The overriding factor in my investment process is the potential for sustainable cash flow generation," Pecher says.

His best call last year was Thomson, a French consumer electronics company that in 2003 began a restructuring to transform itself into a media services company. By April 2004, Thomson was trading significantly below its net asset value because of its underperforming consumer electronics manufacturing divisions. But Pecher believed its asset value far exceeded its stock price and that jettisoning the divisions would unlock the full value of the company. Thomson closed or sold several of its manufacturing operations, and the stock took off. Pecher recommended the stock on April 1, 2004, at about E14 ($16.80); in mid-February it was trading at E20.30. That 31 percent gain contrasted with the 18.9 percent decline in the benchmark MSCI European information technology index.


Tisbury Capital Management


Emanuele Minotti takes risks in climbing mountains to ski on virgin snow, but in researching investments he leaves little to chance. "He gathers all the available information, and then he does an exceptional job of screening it for investment ideas," says one sell-side analyst of Minotti, who appears in our ranking for the first time. The beneficiaries of Minotti's talents are investors in hedge funds managed by London-based Tisbury Capital Management, which has roughly $800 million in European equities. Among Minotti's sources of intelligence: division-level executives, trade union representatives, regulators, databases, news reports and obscure or overlooked financial filings.

A native of Varese in northern Italy, Minotti, 39, earned his undergraduate degree from the University of Milan in 1990 and worked at tire manufacturer Pirelli & C. for three years, helping to reengineer the company's business processes. In 1995 he received his graduate degree from Scuola di Direzione Aziendale Bocconi, Italy's premier business school, and was quickly recruited by Salomon Brothers to cover southern European banks as an analyst.

After a stint as an investment banker at Merrill Lynch's financial institutions group in Milan, Minotti moved to UBS as a bank analyst. In mid-2002 he went to work for hedge fund giant Citadel Investment Group in London. Two years later he joined some former Citadel colleagues at Tisbury, then barely a year old, where Minotti and his team closely cover 20 companies and keep an eye on 80 more.

Minotti describes himself as an "event trader with a very strong value bias." As he explains: "If there's a strong event but not a lot of value, I'm not there. If there's a lot of value and a smaller event, I'll be there. At the end of the day, you're always a value investor, and you keep digging for things others don't see."


Alliance Capital Management

Aerospace & Defense, Capital Goods

In January 2004, Ian Kirwan climbed Aconcagua, a 22,834-foot Andean summit that is the highest peak outside the Himalayas, and he brings a mountaineer's perseverance to his work as an Alliance Capital Management analyst. The 29-year-old Kirwan, who makes his first appearance in the Best of the Buy Side ranking, covers the aerospace and defense and capital goods sectors at Alliance, which has E6 billion ($7.8 billion) in European growth equities under management.

The Irish native earned his BA in economics from the University of Dublin's Trinity College in 1997 before joining the training program at Schroder Investment Management; two years later he became a capital goods analyst. In November 2003 he moved to Alliance.

Kirwan closely tracks how stocks and sectors have performed in past cycles. "Many cycles retrace themselves with surprising similarity," he says. "In a world where short-termism has become an increasing part of life as an investor, this type of analysis is particularly important."

In March 2004, Kirwan recommended BAE Systems, a British designer and builder of aerospace systems, submarines and aircraft weapons, then trading at 200 pence ($3.65). He was bullish about the company's ability to eliminate its cost overruns on defense programs. He also thought the earnings outlook was improving for Airbus, in which BAE has a 20 percent stake. Between March and mid-February 2005, the stock gained 25 percent, rising to 250p. The U.K. FTSE 100 index gained 10 percent during that period.



Retailing/Food & Drug Chains

"I'm a number-cruncher," says Peter Noel Schömig, who follows consumer stocks at Düsseldorf-based WestAM. Schömig, 38, appears in the Best of the Buy Side ranking for the second consecutive year. "Others may look at Ebitda [earnings before interest, taxation, depreciation and amortization] multiples and return on investment, but I'm focused on EVA [economic value added]."

An animal lover who keeps eight cats in his large Düsseldorf house, the Frankfurt-born Schömig worked as an analyst at Commerz Asset Managers and Sal. Oppenheim Jr. & Cie. Then he earned a doctorate from the Faculty of Management at Comenius University in Bratislava. Three years ago he joined WestAM, which manages $81.2 billion, of which 10 percent is invested in equities.

In July 2004, Schömig recommended London-based electronics retailer Kesa Electricals at 282 pence ($5.14). He was bullish about the firm's strong cash flow and its exposure to France, where 75 percent of its operating income is generated. "Given the high consumer spending in the U.K. over the past two to three years, we expect a slowdown there, and, more important, we expect to see better consumer development in France," says Schömig. Kesa shares were trading at 285p in mid-February, outperforming the Dow Jones Stoxx retail stock supersector by 10 percentage points.

Sell-siders appreciate Schömig's self-confidence. Says one, "He will explain to you why you are wrong and then tell you to call him back when you agree."


Universities Superannuation Scheme

Beverages, Media

Talk about a broad mandate. As deputy U.K. equities manager of London-based Universities Superannuation Scheme, the University of Oxford's £21 billion ($40 billion)-in-assets pension fund, Fraser Slater, who debuts in our ranking, tracks 13 sectors -- 150 companies -- representing 40 percent of the FTSE all-share index. That leaves him little time for his beloved golf in his native Scotland. No wonder he's got a 20 handicap.

After earning his master's degree in history at the University of Edinburgh, Slater, 32, worked in European equity sales at Deutsche Morgan Grenfell and as an analyst of European energy stocks at NatWest Markets before joining the buy side in 1998.

Slater looks for market leadership, high barriers to entry, pricing power, recovery and turnaround potential and attractive valuations. Critically, he says, "I like to see stocks with good cash flow generation, which is increasingly important in a low-growth, low-return environment." USS manages a £4 billion U.K. equity portfolio and a £1.6 billion European equity portfolio.

London-based beer company SABMiller met Slater's criteria. He bought in February 2004 at 550p a share."I saw growth in its Miller Lite beer in the U.S. market as the low-carbohydrate Atkins diet took hold," Slater says. Miller Lite has less than half the carbohydrate content of Bud Light, the market leader, he notes. The stock closed at 790p in mid-February.




Christian von Engelbrechten knows when to listen and, perhaps as important, when to tune out. "He's never influenced by market noise," says one sell-sider of the Düsseldorf-based WestAM analyst, who makes his first appearance in the Best of the Buy Side ranking this year.

"My philosophy is to not be carried away by the news flow in an attempt to achieve quick gains," von Engelbrechten explains. "Rather, I try to identify the long-term potential of my companies."

The Dortmund-born analyst, 28, earned a degree in finance, asset management and marketing from Germany's International School of Management in 2002. As part of his studies, he spent a semester at Columbia Business School in New York. "Columbia is where I learned the fundamental analysis that I use today," says von Engelbrechten, who employs a numbers-focused approach to analyze Europe's 30 largest banks.

Notably, the analyst kept WestAM, which has about $8 billion in equities under management, out of German banking giants HypoVereinsbank and Commerzbank on valuation grounds. The two stocks underperformed the Dow Jones Euro Stoxx bank index by 20.9 percent and 17 percent, respectively, in 2004.

He recommended Crédit Agricole in November 2003 at E18 ($21.58), despite investor concerns about its just-announced merger with Crédit Lyonnais. Von Engelbrechten concluded that the merged firm's dominant market share in mortgage lending and asset management in France would benefit from a strengthening economic recovery and significant cost savings at the bank. The country's GDP did grow -- accelerating from 0.6 percent in 2003 to 2.3 percent in 2004, according to the French Statistical Institute -- and the bank slightly lowered its cost-income ratio. The stock was trading at just over E23 in mid-February, up 34.7 percent (including dividends) since von Engelbrechten recommended it. During that period the Stoxx bank index gained 26.3 percent.