After three grim years of bear markets, European fund managers finally had something to smile about in 2003. The MSCI Europe index rose nearly 17 percent in local currency terms, a nice relief from a cumulative loss of 45 percent from 2000 through 2002. European shares gained an additional 4 percent through mid-April 2004. Sanguine investors plowed a net E24.7 billion ($31 billion) into U.K. and European equities last year, reversing 2002's E8.6 billion outflow and bolstering profits at fund management firms.
"Optimism levels are the highest they've been in more than ten years," says Simon Jeffreys, global leader of the Investment Management Industry Group at PricewaterhouseCoopers in London, summing up the sentiment among fund managers participating in the December 2003 Confederation of British Industry/PWC financial services survey. In a welcome change, respondents said they plan to increase spending on marketing and expansion.
The good news extends to employees. For the first time in years, fund managers are even stepping up their hiring of buy-side research analysts -- putting upward pressure on compensation. And the prestige of buy-side researchers is gaining along with their pay. "There was a time when you could have regarded analysts as junior to portfolio managers," says John Hatherley, head of global analysis at London-based M&G Investment Management, which has £111 billion ($197 billion) under management. "But as you get the establishment of more in-house buy-side departments, analysis is increasingly seen as a career in itself and so should be compensated as a senior position."
Indeed, more and more, fund managers see in-house analysts and their investment ideas as an important way to distinguish themselves from their rivals. "We spend money on the resource of buy-side research for the competitive advantage," says Ella Brown, head of European equity researchLondon at Credit Suisse Asset Management. The firm employs 15 analysts in London and Zurich who track 320 stocks, or more than 90 percent of the market capitalization of major European indexes.
The rise of buy-side analysts is particularly important because global brokerage firms are cutting back on research. Brokerages have been squeezed by the bear market; by the $1.4 billion research settlement in 2002 with New York State Attorney General Eliot Spitzer, which mandated that investment banking could no longer subsidize equity research; and by the U.K. Financial Services Authority's drive to get fund managers to break out exactly what they pay their brokers for research and execution. In response to all these forces, securities dealers have pared back their research rosters and coverage lists, leading buy-side analysts to pick up more of the workload.
"When I think about coming up with an investment thesis and ask myself, 'Who on the sell side would I phone?,' there are a limited number of people these days," says David Fishwick, head of tactical asset allocation at M&G.
Fishwick is one of two dozen analysts working at asset management firms whose equity research was deemed Europe's most outstanding by their brokerage firm counterparts in Institutional Investor's fourth annual Best of the Buy Side selections. To choose this year's group, II polled the almost 1,600 brokerage analysts who received votes in our 2004 All-Europe and Emerging EMEA research teams and asked them to name the top buy-side researchers in their investment specialties. More than 550 sell-side analysts responded.
The winners are concentrated among the world's biggest investment management firms: Capital International Research (four team members), Crédit Agricole Asset Management and J.P. Morgan Fleming Asset Management (three each), Alliance Capital Management and Deutsche Asset Management (two each), Government of Singapore Investment Corp., Putnam Investments and others.
The backgrounds of Europe's best buy-side researchers are diverse: Our winners include a CPA, a physics major, a retired semiprofessional rugby player, an ex-sell-side analyst and, of all things, a former financial journalist. Some have decades of experience; others, just a few years. They do, however, have much in common in the way they select stocks.
These researchers know their companies well and dig for information from multiple layers of management as well as from the companies' customers and competitors, and they talk to their contacts frequently. Says one admiring sell-sider of Capital International Research's London-based wireless telecommunications services analyst Richard Bridges, the ex-journalist, "Whenever I call one of the companies I cover, it seems that Richard has just been on the phone with the CEO."
In fact, European buy-side analysts may enjoy an advantage over their brokerage firm counterparts when it comes to management access. Former sell-sider Robin Asquith, who covers food producers and beverage companies out of London for J.P. Morgan Fleming Asset Management ($140 billion in European assets), points out that corporate executives know that what they tell researchers at asset managers is used internally, not broadcast to hundreds of clients.
Confident of their own stock valuations, the most talented analysts can take advantage of misguided consensus views and pounce on cheap shares. For example, in March 2003, Russell Pointon, media analyst at London-based Newton Investment Management, with £21.1 billion in assets under management, thought the market was overreacting to bad publicity surrounding the U.K. retail electronics chain Dixons Group's extended warranties. Britain's Consumers Association argued that extended warranties sold by retailers were overpriced, often went unused and duplicated the manufacturers' warranties. Pointon determined that the bad press was a short-term problem and recommended buying. The shares rose more than 70 percent, to 138p, by year-end 2003.
Nowadays buy-side researchers arrive at these kinds of investment conclusions with less input from the sell side. At DeAM, for instance, researchers aren't interested in brokerage analysts' buy or sell recommendations, and they don't pay much attention to the sell-siders' quarterly notes on earnings. What they want is to use their counterparts "as a sounding board to test our own assumptions and theses," explains William Barron, global head of equity research at DeAM in London, whose firm oversees E320 billion in European assets.
Often an analyst at an investment manager looks to a sell-side researcher to understand the consensus view on a particular stock or industry sector. "It is important to understand what information is already reflected in the stock price," explains Jacques Chazelle, who follows luxury goods from Paris for Crédit Agricole Asset Management, with E49.7 billion in equities under its purview.
Challenging the bearish consensus on LVMH Moët Hennessy Louis Vuitton served Chazelle and Crédit Agricole's clients well last year. Chazelle noted signs of recovery at the French luxury goods company and recommended the shares all year. Net profits for the year grew by 30 percent, to E723 million, and LVMH shares increased from E39 in January 2003 to E58 at year-end.
Holding strong convictions about a stock like Dixons or LVMH is more important than ever as hyperactive hedge funds proliferate in Europe, often pushing shares to extremes. For nimble analysts, the sharp price moves offer opportunities, says Jenny Norris, London-based insurance analyst at Alliance Capital Management, which runs $489 billion around the world. "You have to keep your sights on what adds to the long-term value of a company and not just on the short-term trends," she says.
As buy-side researchers become more important, they are commanding better pay. U.K. recruiting company Morgan McKinley's 2004 salary survey shows that buy-side research analysts and portfolio managers with four to eight years of experience earn from £60,000 to £100,000 in base salary, up 5 to 10 percent over last year after two years of no increases, says Jeremy Canning, head of fund management at the firm. Not surprisingly, bonuses have roughly doubled in the past year and are running between 50 and 55 percent of base, compared with 25 to 30 percent last year, he says.
The high cost of maintaining in-house researchers, coupled with diminished sell-side support, is putting more pressure on traditional midsize asset management firms. "It's difficult to develop proprietary [buy-side] research because it's expensive," says DeAM's Barron. "If you're in the middle market and don't have proprietary research, what are you going to do?"
Even the biggest fund management firms have to think about costs as they move to build up their in-house research efforts. At State Street Global Advisors, which manages $500 billion worldwide, group chief investment officer Alan Brown says he's considering adding analysts in India, much as his counterparts at brokerage firms such as J.P. Morgan and Morgan Stanley plan to do. SSGA now has 14 analysts conducting quantitative research, split between London and Boston, and Brown would like to see that number grow to 20. It's a tough balancing act, he concedes. "There is a price advantage, but that can't be the only issue," he notes. Not if you're trying to build a top-notch research team.
This feature was compiled under the direction of Assistant Managing Editor for Research Lewis Knox and Senior Editor Jane B. Kenney with assistance from Researchers Darline Augustine, Russell Bradley-Cook and Edwina Saddington.
THE BEST OF THE BUY SIDE
* Robin Asquith
J.P. Morgan Fleming Asset Mgmt
Beverages, Food Producers
* Daniel Balthasar
Deutsche Asset Mgmt
Building & Construction
* Dirk Bartsch
Deutscher Investment Trust
Banks
* Richard Bridges
Capital International Research
Telecommunications Services/Wireless
* Jacques Chazelle
Crédit Agricole Asset Mgmt
Luxury Goods
* Alex Cobbold
Government of Singapore Investment Corp.
Oil & Gas
* Gerald Du Manoir
Capital International Research
Luxury Goods
* Markus Engels
Cominvest Asset Mgmt
Insurance
* David Fishwick
M&G Investment Mgmt
Equity Strategy/Developed European Markets
* Julian Gould
Schroder Investment Mgmt
Utilities
* Hendrik Hijink
Putnam Investments
Utilities
* Steven Ho
J.P. Morgan Fleming Asset Mgmt
Paper & Packaging
* John Longhurst
Capital International Research
Chemicals
* Gina Miscovich
Capital International Research
Utilities
* Andrew Ness
Deutsche Asset Mgmt
Equity Strategy/Emerging EMEA Markets
* Jenny Norris
Alliance Capital Mgmt
Insurance
* Christian Pecher
J.P. Morgan Fleming Asset Mgmt
Telecommunications Equipment
* Russell Pointon
Newton Investment Mgmt
Media
* Richard Purkiss
Morley Fund Mgmt
Health Care, Pharmaceuticals
* Stuart Reeve
Crédit Agricole Asset Mgmt
Beverages
* Andrew Reiss
Alliance Capital Mgmt
Telecommunications Services/Wireless
* Peter Noel Schömig
West AM
Beverages
* Simon Todd
MFS Investments
Retailing/General
* Ibra Wane
Crédit Agricole Asset Mgmt
Autos & Auto Parts
