Best of the Buy Side

The financial services industry is facing its most severe crisis in decades because of credit markets that remain largely impaired, despite unprecedented government intervention in the U.S. and elsewhere. Stock markets are experiencing wild volatility, with triple-digit point swings in the Dow Jones industrial average occurring with alarming regularity. The U.S. and the 15 countries in the eurozone are already in a recession, unemployment is rising around the world, and few expect the good times to return anytime soon.

Against this backdrop of seemingly universal negative news, at least one positive development can be found. As sell-side firms — and even some buy-side outfits — trim their staffs and streamline their operations in an effort to cut costs, some money management firms are adding researchers by choosing from the best of the newly available analysts. Investors may still be leery of treating battered markets as a buying opportunity, but savvy buy-side firms have been quick to avail themselves of what they see as a hiring opportunity.

T. Rowe Price Associates, whose assets under management were $345 billion at the end of the third quarter, added 20 analysts in the past year, for a global research staff of 126; the team tracks 1,600 stocks, up from 1,500 one year ago. Eleven of the newcomers work in Asia or Europe, bringing the Baltimore-based firm’s overseas equity analyst head count to 41.

“Our U.S. analysts have their peers in other countries, and they talk to one another and travel with those peers,” explains Anna Dopkin, co-director of North American equity research. “That kind of teamwork happens very frequently,” she says, as investors demand a more global perspective on their investments.

The firm knows about hiring quality analysts: T. Rowe Price researchers capture three of the 11 spots in this year’s Best of the Buy Side, Institutional Investor’s annual ranking of buy-side analysts as chosen by their sell-side counterparts. Nearly 400 sell-side researchers, from 95 firms, who participated in the 2008 All-America Research Team survey (Institutional Investor, October 2008) were asked to name the money management analysts they consider the best in nine industry categories, from Basic Materials to Telecommunications. Two of the nine categories had ties, resulting in a total of 11 winners.

T. Rowe’s Peter Bates shares top honors in Capital Goods/Industrials with Claude Staehly of Wellington Management Co., while Joseph Fath leads the Consumer category. Gabriel Solomon, in his first appearance on the Best of the Buy Side, captures the crown in Financial Institutions (see profiles below).

Fidelity Investments, with $1.4 trillion in assets under management, has two winners: Matthew Schuldt is the best in Basic Materials, and Peter Wright shares the winner’s circle in Technology with Robert Bowman of JPMorgan Asset Management.

Walter Donovan, president of the equity division of Fidelity Management & Research Co., with responsibility for the Boston-based firm’s equity trading, research and portfolio management, says Fidelity increased its equity analyst head count over the past year, from 402 to 439 worldwide, and expanded its operations in Hong Kong, London and Tokyo. He declined to disclose the number of stocks his analysts cover.

The “explosion” in the number of newly listed public companies around the world, Donovan says, is fueling demand for experienced researchers able to find buying opportunities in these tumultuous times: “You need more people to turn over rocks,” he says.

Fidelity’s crosstown rival, Wellington Management, with $450 billion in assets under management, also has two analysts in this year’s survey: Ann Gallo, No. 1 in Health Care, and Staehly.

Mark Mandel, head of Wellington’s global industry research division, added four analysts in the past year, for a total of 54. With ten analysts stationed in Hong Kong, London and Singapore, the firm is able to track about 3,000 stocks, or roughly 90 percent “of the companies around the world that have investable floats of about, or over, $2 billion,” he says.

Having a global presence is essential not only because investors want a broader view of their portfolios, Mandel says, but also because many companies are expanding their international operations. Three of Wellington’s four analysts in Asia cover global conglomerates such as New York–based Colgate-Palmolive Co., because “their growth is in that part of the world,” he explains. The fourth Asia-based analyst covers technology.

Wellington also has three banking analysts in London who cover financial institutions across Europe, emerging markets and Asia.

This year’s other Best of the Buy Side winners are John Mansfield of SAC Capital Advisors, who makes his first appearance on the list, in Energy (see profile, below); Vincent Rivers of Pyramis Global Advisors (Fidelity’s institutional investment division), who is the favorite in Telecommunications; and Andrew Slabin of GLG Partners, on top in Media.

Gabriel Solomon

T. Rowe Price Associates

Financial Institutions

Sell-side analysts say Gabriel Solomon of T. Rowe Price Associates, voted the Best of the Buy Side for his coverage of Financial Institutions, “works around the clock to stay on top of industry and company fundamentals” and is “skeptical about management commentary.”

A native of Los Angeles, Solomon earned a bachelor’s degree in economics from the University of California, Los Angeles, in 1999. He then spent three years as a management consultant in the Los Angeles office of Sibson Consulting, specializing in executive

compensation and corporate governance, before enrolling in the MBA program at the University of Pennsylvania’s Wharton School.

Solomon, 30, says he was eager to attend Wharton for the opportunity to participate in the Wharton Investment Management Fund, a small-cap value portfolio run by 12 students with money contributed by alumni. “We had to pitch stocks to the fund,” Solomon says, recalling the hundreds of hours he spent talking to companies, doing channel checks and building models.

It proved to be good training for his job at T. Rowe Price, which he joined in 2004, because the companies he was initially hired to cover — property/casualty insurers — are “more of a value-oriented group,” he says. Solomon gradually expanded his coverage to include the three remaining “pure-play” trust banks — Bank of New York Mellon Corp., Northern Trust Corp. and State Street Corp. — as well as the big multiline insurers American International Group and Hartford Financial Services Group.

Solomon says T. Rowe did not have much exposure to AIG when the federal government took control of the troubled insurer in September. He had recommended scaling back on the stock in May, based on the deteriorating value of the subprime assets on its balance sheet and the liabilities it had created by underwriting credit default swaps. Solomon says he was concerned that “the losses that I, and many others, had viewed as accounting losses would become real losses.”

Solomon provides active recommendations on about 35 p/c insurers and keeps an eye on 40 more. “One of the things I like is that it’s a broad universe,” he says. Regarding companies for which he doesn’t make recommendations, he notes, “I keep track of them on a quarterly basis, and every once in a while, it makes sense to take a closer look at one.”

He spotted just such an opportunity in Aon Corp. Solomon initiated coverage of the Chicago-based insurance brokerage in August 2005, at $28.46, calling the stock “a long-time underperformer” that offered a great turnaround story. “I met the new CEO, Gregory Case, and I felt that he had a really good understanding of what he needed to do to fix the business and turn it back into a growth engine,” Solomon says. The stock advanced 59.2 percent from the recommendation through November 2008; during the same period the sector lost 54.5 percent. Aon remains one of his top picks.

A “huge sports fan,” particularly when it comes to the Los Angeles Lakers, Solomon likes to keep sports radio on in the background while he’s working. “The current market environment is a little more intense, but T. Rowe is a long-term-oriented shop,” he says. “I really do try to take a long-term view, with a multiyear perspective on my investments.”

John Mansfield

SAC Capital Advisors

ENERGY

Energy stocks have been among the most volatile performers of the past year. Throughout the first half of 2008, rising oil prices fueled demand and investors flocked to one of the few remaining profitable segments of the declining economy. Then, in midsummer, stock prices began to sink as demand for oil and gas decreased. The sector, which had gained 9.7 percent through June, was down 34.1 percent year-to-date through the end of November.

Through it all, no buy-side analyst impressed his sell-side colleagues more than John Mansfield of SAC Capital Advisors, who makes his first appearance on the Best of the Buy Side.

Mansfield, a native of New York City, earned bachelor’s degrees in public policy and economics at Trinity College in Hartford, Connecticut, in 2001, then worked in the business development office of Reliant Resources, a Houston-based electricity distributor. “That’s where I started to learn about the energy business,” says Mansfield, 29.

In 2002, Mansfield moved to an oil-and-gas hedge fund, Houston-based JVL Partners, where he worked with John Lovoi, a former oil field services and equipment analyst at Morgan Stanley (ranked third in the sector on the All-America Research Team in 1997 and second from 1998 to 2000) who had become head of the firm’s oil-and-gas investment banking business in 2000.

“I really learned a lot about the energy sector at JVL, just working in Houston, working with Lovoi and getting a chance to meet so many people from different companies,” Mansfield says.

He spent two years with JVL, then moved to DKR Capital and worked as an energy analyst for the Stamford, Connecticut–based hedge fund for one year before joining SAC in 2005. He primarily covers oil and gas, but “we also do some work in alternative energy,” he notes.

After the steep rise and subsequent decline in the price of oil, “we’ll add back some of the demand that was lost when oil was at its all-time highs,” Mansfield says. However, he points out that lower prices could lead to less investment in new projects and “supply shortages in the future.” It’s already becoming apparent that deepwater reservoir engineering — a technique developed over the past decade or so that is being used to try to extract offshore oil in places such as West Africa and Brazil — “will need to earn a rate of return much higher than originally thought,” he adds.

Mansfield declines to identify the companies he covers, saying that information is reserved for clients only. Sell-side analysts, however, are quick to credit him with winning calls. “He’s got a good combination of short-term understanding with a long-term focus,” says one researcher, adding that Mansfield was one of the first analysts to recognize the potential of Continental Resources, an oil-and-gas exploration and production company headquartered in Enid, Oklahoma. “It was way up — one of the biggest stocks of the year,” this sell-sider notes.

Continental began the year at $26.13 and skyrocketed a phenomenal 212.3 percent, to $81.60, through mid-July before tumbling with the rest of the sector. At the end of November, the stock was still outperforming the sector by 8.9 percentage points.

Mansfield is “on top of things,” the sell-side analyst says. “He doesn’t confuse the forest with the trees.”