A few firms are succeeding at a tough assignment: meeting the growing needs of global investors without spending a bundle.
Shortly after September’s meeting of the Group of Seven finance ministers, Merrill Lynch invited clients to participate in a conference call with the firm’s global strategists from New York, London and Hong Kong. The analysts would discuss the implications of the Bush administration’s less-than-wholehearted support for a strong dollar. More than 1,100 Merrill customers, about four times the usual number, dialed in to hear the Merrill analysts’ prediction of a coming decline in the dollar that threatened to dampen the world’s appetite for dollar-denominated assets.
After several trying years global research is beginning to find an audience again. With global stock markets rebounding and the U.S. economy reviving, investors have more reason to pay attention to the global factors driving the performance of industry sectors, both in the U.S. and elsewhere. Consider the recent performance of the huge U.S. multinationals that tend to benefit most from a falling dollar: In 2003 through mid-November diversified manufacturer 3M Co.'s shares were up 28 percent, sportswear manufacturer Nike rose 39 percent, and conglomerate United Technologies Corp. gained 38 percent.
It’s impossible to track suddenly improving sectors like telecommunications without understanding Motorola, Nokia Corp., NTT DoCoMo and Samsung Electronics Co., or to home in on the cost structure of Western manufacturers like Intel Corp. without analyzing their Asian production strategies. Increasingly, shifts in Chinese demand for steel and other commodities can make or break U.S. and European companies.
“These are the kinds of things that drive the globalization of the research effort,” says Susan Ulick, who heads global research at New Yorkbased TIAA-CREF, which oversees $37 billion in assets worldwide.
Can Wall Street find creative ways to meet this demand? Stephen Way, a portfolio manager at $19 billion-in-assets AGF Management in Toronto, says the Merrill call attracted listeners because “it was unique and a thought-provoking perspective that hadn’t been presented.” But these sorts of efforts, Way cautions, “are few and far between. Most research is mundane stuff. The challenge is to produce insightful and proprietary research on a consistent basis.”
The firms that best met this challenge dominate our seventh annual Global Research Team (see table, page 52). Leading the way, UBS secures first place overall with 23 positions, jumping from fourth in 2002, when it garnered 18 slots. Merrill Lynch takes second place, just one team position behind UBS and with three positions more than its total last year, when it ranked third. Morgan Stanley falls from a first-place tie to third, with 20 team positions, one fewer than it scored in 2002. Credit Suisse First Boston, which tied for first place last year, plunges to sixth this year; while Deutsche Bank Securities rises two notches to fourth place, and Smith Barney Citigroup repeats at No. 5.
Consistency contributed to UBS’s showing. “They have the most globally coordinated view from a lot of local, on-the-ground analysts,” says one investor who singles out the firm’s Technology/Software team (which advances from runner-up to tie with Goldman, Sachs & Co. for first place). “They do the best job of making sure analysts are on the same page.” UBS, he adds, uses its global resources to produce insights into U.S. companies. “If the stock of Motorola is not doing well, they do a good job of looking at Europe and Asia to see who is taking market share,” says the client.
Producing top-flight global research isn’t easy today. Research budgets -- particularly for global services -- are under pressure everywhere. Because it’s costly, complicated and offers an uncertain payback, global research was a prime target when Wall Street executives started hunting for expense reductions in 2001 and 2002. Most research directors privately estimate that global budgets have been sliced by at least 20 percent over the past year or two. A favorite victim was the global research coordinator, whose sole task was to forge a unified global research product from a brokerage firm’s various regional efforts within a sector. Smith Barney Citigroup and Credit Suisse First Boston have eliminated or consolidated many of these positions. Others, including UBS and Merrill, have trimmed global teams as part of broader research staff reductions. “If you go back three years, there were some highly ranked analysts who fancied getting promoted, and you wanted to keep them around for whatever reason. They got the global [sector coordinator] job. Now they’re no longer there,” says a European research director at a brokerage firm in London.
Responsibility for global coordination today often falls to an individual sector analyst who continues to track a regional industry while pulling together occasional worldwide research pieces. The result: fewer global research pieces than there were two or three years ago.
Wall Street’s straitened circumstances have also forced brokerage firms to focus attention more closely on their biggest commission-paying customers. Elsewhere they try to fill in the gaps however they can. “Firms are cutting back their budgets and dumping more and more stuff on the salespeople,” says AGF Management’s Way.
Even research providers concede that they can’t afford to spend lavishly. “What folks are wrestling with is how can you service the global requirement with the existing type of resource base,” says James Gingrich, director of global research at Sanford C. Bernstein & Co. in New York. In many instances this means fewer 100-page tomes chock-full of numbers and more qualitative research. “We’ve gotten away from ‘What’s the cheapest stock in the whole world in the biotech sector?’ and done more along the lines of ‘How is the health care reform in country X going to affect the prospects of American companies?’” says Alicia Ogawa, associate director of global equity research at Lehman Brothers in New York.
Sell-side firms are also moving toward more electronic, interactive offerings. Merrill, for example, now publishes a Global Octane Interactive Analyst Tool Kit, which allows clients to change assumptions in financial models such as interest expense and the price of oil. Another product, a valuation spreadsheet for global retailers, helps investors get a worldwide view of the sector. “On a high level we are trying to customize the products so they are more useful to our clients,” says Candace Browning, Merrill’s head of global securities research and economics in New York. “We are doing that by making them more interactive and more thematic.”
A streamlined approach is understandable in light of recent stock performance. Global investing lost ground in the late ‘90s, when most buy-siders were preoccupied with U.S. technology stocks. And until this year virtually all of the world’s markets were dripping red ink and many multinationals were pulling back, limiting the appeal of global research. U.S. tax-exempt assets managed globally actually shrank to $34 billion in 2002 from $45 billion in 2001, and new global equity mandates from tax-exempt investors totaled $1.3 billion in 2002, half what they were the year before, according to data gatherer InterSec Research in Stamford, Connecticut.
In the eyes of the investors who do follow stocks globally, the firms and analysts listed here are delivering much of what’s needed. For example, investors say that London-based basic materials analyst Peter Hickson and his colleagues at UBS produced a first-rate report last November on how rapid Chinese economic growth would increase demand for aluminum, copper, ethylene, iron ore, oil, nickel, platinum and steel, among other metals and materials. They recommended potential beneficiaries that included U.S. chemicals producer Dow Chemical Co. (up 29 percent from when the report was issued through mid-November), MMC Norilsk Nickel (up 160 percent) and U.K. miner Rio Tinto (up 15 percent). “UBS was in front. They did the analysis and made specific forecasts on how big an impact it would have,” says an appreciative investor. Hickson and company take first place in Metals & Mining for the third year running.
Investors wish all firms could do as well. Even within highly ranked firms, say investors, the quality of the global effort varies greatly depending on the commitment of the leader and the various individuals involved.
“What we would like is a team of people working without geographic boundaries,” says Norman Boersma, director of portfolio management at the Toronto office of Templeton Worldwide, which manages $97 billion globally. “People have gone from total silos to taking the silos apart to some degree. They are talking, but they are not one team.”
“Very few houses are actually offering any kind of an integrated approach from a sector level,” AGF’s Way says. “It is very difficult to talk to anybody at a global firm and have them be able to compare Japanese banks to European banks to emerging-market banks and really have knowledge on that. The houses have a lot of work to do when presenting a global perspective in a lot of different sectors.”
What impresses investors most is sector research across borders with an overall global theme. Good global research “encompasses all the major companies that would highlight the trends in each market,” says Peter Boardman, an equity analyst for the International Fund at $19 billion-in-assets NWQ Investment Management Co. in Los Angeles. “The most important thing is being able to see how companies are valued globally.”
On balance, brokerage firms seem to be making some headway in meeting these needs while adhering to strict budgets. Participants in this year’s Global Research Team who expressed an opinion rated the quality of global sell-side sector research at 5.87 on a scale of 1 to 10, up slightly from the grade of 5.54 they awarded in 2002.
“The product is maturing,” agrees Tom Hill, the London-based global head of equity research at UBS. Three years ago, he notes, a brokerage firm could distinguish itself by including stock picks along with the standard macroeconomic analysis. Today everyone is making stock picks, and investors are keeping score of the successes and failures. “Good analysis should lead to making better recommendations, so it is a fair bet that people who make consistently good recommendations must have been doing consistently good work, which is worth paying for,” says Hill.
These rankings were compiled by Institutional InvestorEditorial Research staff under the direction of Assistant Managing Editor for Research Lewis Knox and Senior Editor Jane B. Kenney. Contributor Charles Keenan wrote the overview.
Click here to view the entire The 2003 Global Research Team results.
