Analyzing the world’s markets has never been more risky - or more critical to investors.
By Mike Sisk
December 2001
Institutional Investor Magazine
For the complete 2001 Global Research Team results please go to the Research & Rankings section of this site.
Two mornings after the obliteration of the World Trade Center, Morgan Stanley’s global research director, Dennis Shea, called a meeting of the group,s 275 senior members, trying to take stock. There was still uncertainty about the fate of 2,700 Morgan Stanley colleagues who worked in Tower Two, just a few floors below where a United Air Lines jet had crashed; the U.S. stock markets were shut down; foreign markets were tumbling; and communication was a nightmare.
“All flights were grounded, so we had people stranded all over the country and the world,” says Shea, who anchored the meeting from a 14th-floor conference room in the firm’s Midtown headquarters. (Six employees died at the Trade Center.)
Plugging into the conference call were researchers on airport pay phones and in hotel rooms , in places like Wichita, Kansas; Rabat, Morocco; and Taipei, Taiwan , analysts working from their kitchen tables in the suburbs of New York and team members hooked up to videoconferencing systems in Morgan Stanley’s offices in the U.S., Asia, Europe and the Middle East. “There was still a lot of fear and concern but also an understanding that life went on,” says Shea. “And we realized our clients were going to need to rebalance their portfolios; they had a fiduciary responsibility to their clients to do so. We needed to help.”
From the one-hour session, a variety of cautionary strategic pieces emerged, covering everything from U.S., Asian, European and U.K. equities to fixed-income projections and global economic forecasts. The firm also offered two specific stock picks: Munich Re Group, the German reinsurer that estimated it would lose E1 billion ($907 million) from the terrorist attacks, and Swiss Reinsurance Co., which projected an E800 million loss. Given the surge in demand for insurance, however, the companies, longer-term prospects had actually improved, researchers concluded. Although some of Morgan Stanley’s advice turned out to be a bit too pessimistic, Munich Re and Swiss Re were top-notch selections: The shares surged 34 percent and 30 percent, respectively, over the next few weeks.
The terrorist attacks in the U.S. illustrated just how interconnected the world’s markets have become. The sharp drop in airline travel and the growing certainty of a U.S. recession not only sent shares of UAL Corp., parent of U.S. carrier United Air Lines, down 66 percent in the two months following the attack but also helped to shove struggling Swissair into bankruptcy. Asian airline stocks swooned. Virtually every country risk model needed to be reconsidered: A big portion of Pakistan’s crushing debt was forgiven; would that help Argentina? The U.S. and Russia suddenly solidified their ties; did that undermine China’s influence? And there was a long list of potential corporate beneficiaries. What global pharmaceuticals companies were best positioned to counter bioterrorism? Which aerospace and technology companies would prove most vital in assuring national and personal security?
Questions like these only underscore the importance of astute global research and on-the-ground analysis. Certainly, the demand is there. As more and more multinational companies emerge, many buy-siders have gradually been shifting to a sectoral, rather than country-based, strategy. They want to weigh the advantages of owning Verizon Communications against NTT DoCoMo or France Telecom; they want to evaluate the prospects of international competitors like Deutsche Bank and Citigroup. And investment banks are responding with alacrity, pouring resources into building their global teams.
“The adjustments on the sell side are a reflection of what’s going on in the world,” says Susan Ulick, head of global research at TIAA-CREF, which has $280 billion in assets. “There are very few sectors you can look at on a country-by-country basis. Even something like publishing: Look at Pearson , it’s a U.K. company that’s made a lot of U.S. acquisitions.”
The purpose isn,t just to track huge multinationals but to keep pace with virtually all companies in a tightly interwoven world. A U.S. technology hardware company, for example, may rely on Asian foundries for supplies of silicon and market its wares to customers in Europe and Africa. Understanding the global food chain becomes vital to understanding these companies, prospects. “You must harness the whole network of knowledge, resources, information and analysis around the world to improve the odds of making a good call on a stock,” says Tom Hill, global head of equity research at UBS Warburg.
This year Hill and his team harnessed that network and made those calls more frequently than any of their competitors, in the opinion of institutional investors polled by this magazine. Fourth a year ago, UBS Warburg surges to the top position of the 2001 Global Research Team. Bolstered by its 2000 acquisition of PaineWebber, the firm adds nine team positions to last year’s tally, for 22 overall. Also moving up rapidly is another investment bank with a big, deep-pocketed Swiss banking parent: Credit Suisse First Boston. Aided by its integration of Donaldson, Lufkin & Jenrette, CSFB snags 12 more team positions than it had in 2000 and finishes this year in a tie for third place, a hefty improvement from seventh a year ago. CSFB ties with Morgan Stanley, last year’s No. 1, and Goldman, Sachs & Co., which last year tied for second place with Merrill Lynch. Merrill holds on to second this year.
All of these firms are scrambling to meet the research needs of their institutional investor clientele. Though some U.S. shops, notably Fidelity Investments, Templeton (now Franklin-Templeton) and Capital Research, have been organized by sectors for decades, their approach is now being widely adopted. In all, more than two dozen of the world’s largest money managers are estimated to follow a global approach to investing. European firms , in particular, Deutsche Asset Management and Gartmore Investments , have been moving more aggressively in this direction.
The European firms are responding to a number of factors, beginning with the increasing globalization of companies. A number of Continental asset managers started their efforts in the late 1990s, hoping to participate in the U.S. bull market in technology. Says Mayree Clark, global head of research at Morgan Stanley, “Some large European money managers who were underinvested in the U.S. were seeking a global perspective on the market as a way of better understanding the dynamics of the U.S. market.”
A more tightly unified Europe also brought changes. Investors increasingly are able to look beyond their own borders to evaluate industry sectors. After the euro goes into circulation on January 1, they won,t have to worry so much about the 11 euro-zone currencies and can focus primarily on the dollar, yen, euro and sterling, making for much easier comparisons. European pension reform, which is gradually increasing the amount of money available for equities investment, is spurring European firms to examine global opportunities. “Over the past year more and more buy-side guys have organized along a less regional basis,” UBS Warburg’s Hill says.
Investors are taking a global outlook, and they expect the same from researchers. “More clients have a global mandate,” adds John Hoffmann, global head of equity research for Citigroup/Salomon Smith Barney. “They say: ,I want you to pick the best stock. I don,t care about the region, U.S., Europe, Asia, whatever. You tell me.,” Despite the difficult economic climate, Citi/SSB has grown its dedicated global research team from six to 28 people in the past year and plans to add a further dozen analysts in the year ahead, says Hoffmann. It’s one of the few Citi/SSB departments budgeted to expand in 2001 and 2002.
Although more money and time have been devoted to global research, much still needs to be done. In a poll of the buy side conducted by Institutional Investor as part of compiling the Global Research Team, investors rated the quality of analysis a middling 5.8 on a scale of one (lowest quality) to ten (highest), although nearly 52 percent said the quality had improved in the past year. Providing a comprehensive global view “is certainly an objective of the better firms,” says TIAA-CREF’s Ulick, “but I don,t think anybody has particularly achieved the real goal of globalization.” To Ulick, that means analyzing every sector and business without regard to borders.
Henry D,Auria, the director of research for global equities for Bernstein Investment Research & Management, a unit of Alliance Capital with $39 billion in assets, says that the quality of research varies not only among firms but within firms. “While it may be a firm’s goal, the execution is dependent on individuals who are still motivated by what’s best for individual franchises,” he says.
The most critical shortcoming is the lack of comparative valuations between similar companies from different countries. “Most reports on big firms like Citigroup focus on valuation versus other U.S. stocks, even though it’s one of the best examples of a multinational,” D,Auria says. When sell-side research does make valuations that transcend borders, it doesn,t take the next step of “answering the question of whether the valuation is justified or not. And that makes it very difficult to use the research to actually buy or sell.” D,Auria concedes that the sell-side approach reflects the desires of a big part of Wall Street’s customer base, which continues to focus primarily on domestic markets. “Analysts, day-to-day job is still taking care of that regional money. They,re still being asked, ,How does this stack up against my regional allotment?,”
There are inherent challenges to conducting business globally. Time zones, for example. Morgan Stanley,s Clark faced this problem right after September 11. Rather than fly to Asia for meetings, she stayed in New York , but shifted to Asian time, roughly 12 hours ahead. Working nights and sleeping during the day, she kept every one of her appointments thanks to videoconferencing, which since the attacks has become a mainstay of Wall Street research. Clark became a devotee of the medium after the attack, when she was able to hold a meeting with colleagues in Bombay, Hong Kong, Seoul, Singapore and Taipei.
Clark may be an extreme example, but her emphasis on constant contact with analysts and customers around the world is embraced by virtually all research directors. Says Merrill Lynch’s head of global research, Deepak Raj: “Communication is critical to setting up this infrastructure. Communication is key to success.”
Still, even with the proper systems in place, productive teamwork isn,t guaranteed, says Alfred Jackson, global head of equity research at CSFB. Jackson says he’s resorted to “moral suasion” to encourage participation by analysts who think they don,t have much to gain. “Our biggest challenge is that the people in Asia and Europe see the benefit more than their U.S. counterparts. Unfortunately, some U.S. analysts feel they get less than they give.” And when everyone participates, disagreements arise, manifesting themselves in something as basic, though important, as setting a firmwide forecast for oil prices.
UBS’s Hill agrees with Jackson that a great challenge is “persuading individual interests to participate.” His firm uses compensation to grease the gears. A scoring system that allows analysts to rate the quality and quantity of help they,ve received from their fellow researchers is part of the review process , and a factor when bonuses are calculated. “By persistent attention to these issues of compensation, we,ve fostered some pretty good teamwork,” notes Hill.
UBS’s global sales team also plays a part. Each day it distills all research, conveys the findings directly to certain investors and holds a conference call to a wider audience of clients. “The team has the effect, first, of taking the global product and making it usable by the customer and, second, letting analysts see how their work is valuable,” says Hill.
One of the most effective ways to get a firm,s message out to global investors is by building a database that can make apples-to-apples comparisons. Several global research directors admit they,ve had to scramble to roll out comprehensive data solutions over the past 12 months. For instance, Merrill’s global database, introduced gradually over the past year, is now up and running for most sectors. It already offers real-time data on shipments of key components for Dell Computer Corp. and Compaq Computer Corp. products, which Raj says is a “fantastic advanced indicator of sales in the U.S. and a timely way to analyze companies.” Databases will be in use by all sectors by the end of this year. (A real-time database, which can include everything from firm forecasts to raw numbers, is also a valuable communication tool for analysts, eliminating the need for off-hour conference calls, Citi/SSB’s Hoffmann points out.)
Even if more and better data are now available, earnings quality and corporate governance issues remain. Hill points out that global research must extend beyond quickly extracting clean financial information. To make a credible buy or sell recommendation, an analyst also must understand risk. Russia’s Gazprom may rival ExxonMobil in certain businesses, but whose numbers do you trust? “What,s most relevant to a customer on the buy side is the interrelation of country risk versus the interrelation of industry risk. The real value added is to incorporate all this work into a buy-side decision,” notes Hill.
That’s a tall order , and exactly what investors like TIAA-CREF’s Ulick want. “If I,m talking to a CSFB analyst about Hutchinson Whampoa’s strategy involving Vodafone, I want a consistent view no matter where I am or who I,m talking to at CSFB,” says TIAA-CREF’s Ulick. “What I want is a completely coordinated near- and long-term view and to take that all down to a specific country and then company valuation.”
For that kind of consistency, she may have to wait a little longer.
For the complete 2001 Global Research Team results please go to the Research & Rankings section of this site.
