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Even as Hurricane Charley roiled the waters of the Caribbean in early August, the Florida State Board of Administration was making a few waves of its own. The $104 billion system doled out the final portions of $4 billion that it had pulled from U.S. and international managers and gradually reallocated to six global money managers -- the biggest such mandate ever by a public employee retirement system. Why the change? “We wanted to remove any country or regional limitations on portfolio managers and free them to choose those stocks that will provide us with the best return,” explains Michael McCauley, FSBA’s Tallahassee-based director of investment services and communications.
Florida, which first authorized the move nearly two years ago, selected four core managers -- UBS Global Asset Management in Chicago; Franklin Templeton Investments in San Mateo, California; Toronto-based McLean Budden; and Bank of Ireland -- to invest in various types of mostly larger-capitalization companies in developed marketplaces. FSBA also chose two core-plus managers, Woodside, Californiabased Fisher Investments and Edinburgh’s Walter Scott Partners, which, says McCauley, will buy the “upper tier of emerging markets -- like South Korea.” Each firm has a different approach, but their briefs are similar: They are to research and invest in the best companies, regardless of domicile, around the world.
“They hired truly global teams,” says William Libby, director of InterSec Research in Boston, which tracks global money management mandates. “They weren’t willing to settle for the bolting together of domestic and international investment research that a lot of firms try to pass off as global. That’s going to make others take notice.”
Some have. For most of the late 1990s, global mandates averaged roughly $1 billion a year, according to InterSec. Last year the figure jumped above $4 billion, and it hit $2.6 billion in the first half of this year. The $26.5 billion-plus-in-assets Virginia Retirement System late last year announced that it would commit $1.5 billion to six global managers. Chief investment officer Nancy Everett says she wants VRS’s money managers “free to roam” the globe so they are not, for instance, limited to General Motors Corp. or Ford Motor Co. in the autos sector.
To meet this demand won’t be easy for Wall Street’s global equity research departments. From 2000 through 2003 many big brokerage houses undertook painful reorganizations in response to the bear market and regulatory pressures and cut global research operations back sharply. Relatively new, not especially lucrative and expensive to operate, global analysis made an easy target. Dozens of global analysts and coordinators lost their jobs.
Now Wall Street will need to rejuvenate its research work to keep pace with renewed investor interest -- without busting firms’ budgets. Research directors say they plan to invest more in global products, fashion more creative attempts to help investors address important global themes and place greater emphasis on communicating these themes. In early December, Deutsche Bank Securities said it was reorganizing its global research as part of the creation of a global markets division. Going forward, Deutsche will bring equity and high-yield bond analysis together to form a unit known as company research, one of four global analysis entities that also include macro, market and quantitative groups. In a prepared statement new global markets research head David Folkerts-Landau said the shift was needed because securities markets around the world are being “integrated to a degree unimagined even three years ago.”
That doesn’t mean most brokerages will be adding to their head count. Cautions Nick O’Donohoe, J.P. Morgan’s global head of equity research, “Don’t expect significant additions of people.” To some degree, manpower is less important in building a top-notch global research team than departmentwide focus and commitment, says Alan MacDonald, UBS’s London-based global research chief. “A global outlook is right at the core of all our research,” even where the analysis is not packaged as a global report, he says. “Dialogue among our regional analysts is absolutely essential to producing a consistent view of industries worldwide.”
MacDonald’s message appears to be getting through to his analysts. For a second year in a row, investors say the firm is doing the best job of providing global research, awarding it the No. 1 spot on Institutional Investor’s 2004 Global Research Team. In all, UBS takes 26 team positions, up from 23 a year ago. Moving up sharply from sixth in 2003 is UBS rival Credit Suisse First Boston, which ties for second with Merrill Lynch. Morgan Stanley and Smith Barney Citigroup tie for fourth.
Investors appreciate the renewed efforts these and other firms are putting into global research. “There has been a fairly determined effort by the sell side to improve their global product, both in terms of communication among the analysts and coordinating the research product,” says Cindy Sweeting, who runs global research for one of FSBA’s new managers, Franklin Templeton. She and other money managers say that research incorporating global themes and new quantitative products designed to compare companies and industries across borders are arriving more frequently on their desktops.
Why are both the buy and sell sides so interested in global investing these days? In a word: China. The Middle Kingdom’s gargantuan appetite for everything from steel to fried chicken to semiconductors has propelled the shares of U.S. companies as disparate as U.S. Steel Corp., Yum! Brands (owner of KFC) and Intel Corp. Two of Brazil’s biggest iron-ore exporters, Co. Vale do Rio Doce and Mineração Brasileira Reunida, ship nearly 25 percent of their goods to China. The country’s rapid emergence is having a similar effect in Europe and throughout Asia.
Besides China’s phenomenal growth, there is a resurgence of overseas ventures, including cross-border mergers and acquisitions like Spanish banking behemoth Banco Santander Central Hispano’s $16 billion purchase of U.K.'s Abbey National. U.K. oil giant BP’s various partnerships with Lukoil Oil Co. and other companies in Russia have also made it impossible for any investor to understand BP without timely information about the state of its growing Russian portfolio. For that matter, they also need to know about BP’s and Lukoil’s standing at the Kremlin to make well-informed decisions about either company’s shares.
More than 20 industries today can be considered global, in that they do not confine themselves to a single geographic marketplace. Although the pharmaceuticals business’s major branded players are mostly in the U.S. and Western Europe, leading generic producers like Dr. Reddy Laboratories (India), Richter Gedeon (Hungary) and Teva Pharmaceutical Industries (Israel) are spread all over the world. In telecommunications, L.M. Ericsson Telefonaktiebolaget, Motorola, Nokia Corp., NTT DoCoMo and Samsung Corp. are battling it out across three continents. There are even major global divides within individual companies. Spain’s leading telecommunications provider, Telefónica de España, gets a third of its revenue from its Latin American operations.
To offer their clients meaningful insights without emptying their pockets, Wall Street firms are trying to work smarter. Smith Barney Citigroup, which sharply cut its global equity effort in late 2002 and early 2003, has been cautiously reentering the fray. Says William Kennedy, director of global equity research, “Most of our investment this year has been on the infrastructure side,” including the introduction or reintroduction of three major global research products. Among them: DataCiti, the firm’s first global database comparing companies across country and regional lines; Global Portfolio Strategist, a new biweekly publication that offers investment ideas and highlights global themes; and “SectorMapping,” a retooled report designed to give investors analysts’ specific stock picks based on global trends. “We’re focusing on having our existing staff come together in different ways so we can better utilize their talents,” he says.
Merrill Lynch, says global product manager Daniel Lubash, is planning to “give global a big boost” in the year ahead. But as he looks to channel his resources effectively, Lubash has tightened the definition of which industries are global. Electric utilities, he contends, aren’t truly global because they are locally regulated; other businesses such as consumer goods and retailing are essentially local markets affected by global economic trends. Lubash intends to concentrate Merrill’s global products on areas such as autos, banks, metals, oil and gas and telecoms, where he thinks cross-sector thematic research can add tremendous value. A recent Merrill study looked at how global sectors generated cash and where they were likely to make capital expenditures. “Clients would much rather see thematic pieces than huge spreadsheets with every possible bit of global data,” says London-based Lubash.
Templeton’s Sweeting isn’t the only buy-sider to take note of Wall Street’s refocused commitment. An analyst at one Southeast Asian fund says, “It’s not that the sell side has improved quality dramatically in areas like analytical ability or spotting trends early on, but rather there has been an honest attempt to address how companies will be affected by the increasingly global forces of change.” This analyst notes that many firms in the past year studied the effects of the expiration of certain textile quotas, tracing the supply chain impacts from local Chinese mills all the way through to U.S. and European retailers. The communication within the firms impressed her. “The Asian analysts were talking to the U.S. ones and vice versa, so you did get quite a good all-around picture at the end of the day,” she says.
Both internal and external communication have improved in large part, say investors, through the increased use of specialist salespeople. Gavin Launder, an analyst with London hedge fund manager Callidus Capital Partners, singles out UBS’s efforts in particular. At other firms a leading regional analyst is usually asked to “risk his local franchise” to become a global coordinator for the firm’s work, notes Launder. As a result, the researchers often tend to their local or regional duties first and approach the global portion as an afterthought. UBS, in his view, has correctly put this communication job in the hands of “a senior specialist salesperson with deep industry knowledge” who does not have the same conflicting regional and global loyalties as an analyst and actually helps draw together and disseminate the firm’s message more consistently and effectively.
Although some investors worry about salespeople parading as analysts, Colin Moar, an analyst with Morley Fund Management, says they do a good job of “filtering the noise” from regional or local reports and pulling out the global ideas he’s most interested in. It’s particularly helpful, says London-based Moar, whose firm oversees £118 billion ($228 billion), when these salespeople have an industry or sector focus.
Investors reward the overall global research effort with higher marks. Asked to rank brokerage firms’ overall global research work on a scale of 1 to 10 over the past 12 months, respondents on average gave it a 6.20, a nice gain over last year’s 5.87. Still, there’s lots of room for improvement. Nearly 89 percent of respondents this year said they were just “somewhat satisfied” with global research, and only 6 percent were “very satisfied.” That’s a slight improvement on both counts over last year, but it suggests that many investors believe the research departments can do a better job.
It helps a global team considerably, of course, when it’s transmitting a message that makes money. UBS’s steel analysts (part of UBS’s Metals & Mining team, co-led by Peter Blight and Peter Hickson, which takes first-place honors) were lauded by several buy-siders for their work in China. Hickson provides overall global steel coverage, and in Asia he works closely with Young Chang, who covers South Korean steel producers, and Lance He, who monitors Chinese steel companies. “They were all over the China impact in 2003 and again this year,” one portfolio manager says. And they didn’t just take the consensus view that China’s massive infrastructure needs would boost steelmakers’ fortunes. The UBS team was well out in front of rivals last February in cautioning that Beijing was likely to take measures to curb growth and that global steel stocks would be vulnerable if it did. When the sell-off in steel and other basic materials occurred this spring, the UBS analysts were already looking around the corner to a rebound and recommended overweighting again. Global steel stocks subsequently doubled by early December.
Although there have been dozens of great calls in all sorts of markets in the past year -- Citigroup strategists, for example, recommended buying U.S. and European shares just before their big fall rally -- recommendations and research about China have given global research a much-needed blast of fresh air. “China has a direct impact on every single sector among the 20-plus sectors we follow in global research,” says J.P. Morgan’s O’Donohoe.
For that reason, China is the sole exception to O’Donohoe’s vow to keep a lid on new global research hires. When J.P. Morgan in August opened its office with 12 Chinese-speaking analysts in Shanghai’s expansive Pudong business district, it became only the second Wall Street firm to have a full-fledged mainland office (global research victor UBS opened there in 2003). London-based O’Donohoe wants to add three more analysts there by the end of 2005’s first quarter. China is just that important to first-rate global research these days.
These rankings were compiled by II Editorial Research staff under the direction of Director of Research Operations Group Sathya Rajavelu, Assistant Managing Editor for Research Lewis Knox and Senior Editor Jane B. Kenney, with the assistance of Researcher Carolina Santos. Contributing Editor Scott McMurray wrote the overview.
