When Gilbert Kaplan, founder of Institutional Investor, walked into editor Peter Landau’s office one warm summer day in 1972, little did either man realize the profound impact that Kaplan’s request would have on the magazine — and on the industry it covers. Kaplan, a former economist at the American Stock Exchange who had launched II five years earlier at the tender age of 26, told Landau, “We’ve got to do a story about the best analysts on Wall Street,” the former editor recalls. “But he didn’t tell me how we should do it.”
The task was left to Landau, who brainstormed that evening over drinks with Wayne Welch, managing editor of another II publication. It was around the time of the All-Star Game; Welch suggested that the magazine use baseball as the theme and create an analyst all-star team. Landau liked the idea, except for the fact that Kaplan intended to publish the feature in October, after the baseball season was over.
“Then I thought, ‘We could put these guys in football uniforms and call it the All-America Research Team,’?” says Landau, who was editor of Institutional Investor from 1971 to 1991.
And so the team was born.
To identify the analysts worthy of inclusion, Landau and Kaplan turned to the folks whose opinions mattered most: the money managers and other institutional investors who used the researchers’ services. That first year II began a practice that would hold up for decades: sending out questionnaires to hundreds (and later thousands) of money management firms and institutional investors asking them to rank the analysts, across a variety of industries, who had been most helpful during the previous 12 months. The questionnaires were followed by several months of reporting by II staffers, who spoke with firms that didn’t return their surveys, to get them to do so, and with those that did, to find out more details about their selections. The data were then compiled and analyzed to determine the top three analysts in each industry, as well as runners-up.
“The initial impact on Wall Street was extraordinary, because analysts who were not regarded as outstanding within their own firms found themselves at No. 1 or No. 2 in their industries,” Kaplan says. “It changed their careers.”
Dennis Leibowitz would agree. “It wasn’t just a popularity poll,” says Leibowitz, an analyst with research boutique Coleman & Co. when he was named No. 1 in Lodging in the inaugural ranking. “Presumably, it reflected the quality of your work as seen by your clients. It was a nice accolade to have. It was very exciting.” Leibowitz would go on to have 24 more first-team finishes, across four industry categories (Broadcasting, Cable, Cellular and Lodging). Most of those victories came while working for Donaldson, Lufkin & Jenrette Securities Corp., where he was an analyst from 1977 through 2001.
In 1972 the All-America Research Team had 85 analysts in 26 industry groups. This year, which marks its 40th anniversary, the team includes 312 analysts across 65 different industries and sectors. During the early years the data were calculated by hand, and editorial judgment played a role in the selection process, especially when the race was tight in an industry or sector. Today most of the questionnaires are filled out electronically, computers handle all the calculations, and the rankings are determined strictly by using numerical scores (which are audited by an outside firm).
Even as picking the team has morphed from art to science, its importance to analysts — and to their firms — has been a constant. In January 1976, New York magazine recognized the growing importance of the All-America Research Team in a feature story titled “Playing God at ‘Institutional Investor,’?” which took a hard look at the impact the team was having on the research business. The article described how far analysts would go to try to secure a position on the team; one still-popular strategy was to make a barrage of client visits right before II sent out its questionnaires.
The New York story also included an anecdote about then–Merrill Lynch & Co. chairman Donald Regan that has since taken on mythic proportions both inside and outside II. Regan was reportedly incensed that Merrill had only a handful of ranked analysts and instructed the firm’s director of research to remove the rubber band from around his wallet and start hiring top analysts from other firms. The research director got the message: Later that year Merrill — which didn’t have a single analyst in the first survey and ranked No. 11 in 1975 — leapfrogged to the top of the Leaders table with a whopping 23 team members, seven more than second-ranked Mitchell, Hutchins & Co. and 11 more than the previous year’s winning firm, H.C. Wainwright & Co. Merrill would go on to lead the team a record 19 times (see table, page 38). Merrill, however, comes in third for all time when ranked by total team positions; its 767 trail both Goldman, Sachs & Co. and Morgan Stanley, which have 1,106 and 874 positions, respectively (see table, above).
By the late ’70s big Wall Street firms like Merrill, Goldman and Morgan Stanley dominated the survey, as many of the research boutiques like Coleman and H.C. Wainwright had dissolved, unable to compete in a world without fixed-rate brokerage commissions (deregulated in 1975). By 1980 the number of firms on the team had shrunk to 37 from 61 just six years earlier, even as the number of categories and total team members had expanded. But it wasn’t until a bull market began in 1982 and capital markets activity experienced a resurgence that firms started to see a financial payoff from having top-ranked analysts.
“The team became more and more important,” says longtime analyst Leibowitz. “It was helpful in terms of access to corporate executives. And it was also important to investment banking. [Having top-ranked analysts] was probably more important to the investment bankers than it was to the research group, actually. [The bankers] used that as an entrée into deals, particularly underwritings, because the analysts had to market the deals.”
At DLJ, Leibowitz got increasingly involved in the investment banking side of the business as his firm helped bring many cellular and cable television companies public and later advised them on mergers and acquisitions. By the mid-’90s, Leibowitz was spending a significant amount of his time on investment banking and had hired analysts to cover the broadcasting, cable and cellular industries for clients; he operated as group head, overseeing overall strategy but covering just a handful of companies.
Today no analyst can wear two hats. The 2003 global settlement spearheaded by then–New York State Attorney General Eliot Spitzer forced participating Wall Street firms to sever all economic ties between research and investment banking and prohibited analysts from even talking with bankers without a compliance officer in the room.
Leibowitz, who now manages a $425 million, New York–based long-short hedge fund, says his investment banking activities never influenced his stock recommendations. Not all ranked analysts have been so scrupulous. According to the Spitzer investigation, in late 1999 former Salomon Smith Barney analyst Jack Grubman raised his normally bearish rating on AT&T Corp. to curry favor with his boss, Citigroup CEO Sanford Weill, whom Grubman would later ask for help in getting his kids into New York’s exclusive 92nd Street Y preschool. In April 2003, Spitzer, the Securities and Exchange Commission, NASD and the New York Stock Exchange permanently barred Grubman from the securities industry and fined him $15 million for issuing fraudulent research reports. Grubman, who neither admitted to nor denied the allegations (although he did agree to the fine and punishment), appeared in multiple sectors of the All-America Research Team every year from 1987 through 2001, finishing No. 1 eight times.
Grubman made about $20 million a year in the late ’90s. Although most analysts didn’t come close to matching that gargantuan pay package, good ones who helped bring in banking business could make $5 million a year, says Leibowitz. “Even the average guy was probably paid $1 million to $2 million,” he adds.
Analysts saw significant pay cuts over the past decade as the large Wall Street firms have pared back their research budgets and recalibrated compensation, but talent was, and continues to be, amply rewarded. In 2006 the average senior analyst made about $590,000 a year, according to an exclusive survey by II. By contrast, members of the 2006 All-America Research Team made $1.4 million, on average.
The past decade has seen a significant change in the look and feel of the All-America Research Team. Landau’s original idea, to put an illustration of the winning analysts in football jerseys on the cover of the magazine, was a mainstay of the team for its first three decades. The style of the illustration changed over the years, but the theme always stayed the same. In 2000, II editor Michael Carroll cast aside the trademark team illustration on the cover of the October issue and instead ran a photograph of an analyst kicking a gold football.
The next year, to celebrate the 30th anniversary of the ranking, Carroll scrapped the football theme entirely, opting instead to run a photo essay celebrating the winners, shooting small groups of analysts in a variety of locations around New York City. II had scheduled several shoots for September 11, including a morning session at the New York Public Library and a noontime one in the park right outside the World Trade Center. The shoots were canceled when terrorists attacked and destroyed the twin towers that morning. Abandoning the original photo essay idea, II commissioned a model maker to build a replica of the towers, made of metal plates bearing the names of the victims, which was photographed against a black backdrop for the cover.
Wall Street has undergone enormous changes during the past four decades, most of which have been chronicled in the pages of II. One of the things that has not changed is the cachet that comes from winning a spot on the All-America Research Team, especially for the top-ranked analyst in an industry or sector.
“It’s an honor to be ranked,” says Ivy Zelman, who has been No. 1 in Homebuilding ten times, first with Credit Suisse and more recently representing her own firm, Zelman & Associates. “You’re not supposed to care because it’s a popularity contest, but I think it means that you’re well regarded by the people you’re servicing: your clients. It’s a badge of honor.”
