Unless you want to be bored, don’t read this story.
At least that’s what Ed Hyman — the man who has dominated Institutional Investor’s All-America Research Team for nearly four decades — suspects when informed that II would be writing about how his and his peers’ methods have changed since they started in the research industry.
“This could be uninteresting because the research industry hasn't changed that much,” muses Hyman, chair of Evercore ISI and leader of the firm’s economic research team, who started his research career in 1969 with Data Resources, an early provider of economic forecasts.
But wait: Hasn’t the evolution of research — driven by technology, a deluge of data, regulation, and the shift to passive investing — changed almost everything about his job? Perhaps, but according to Hyman, while the technology, mechanisms, and delivery of research have really evolved, the core of the business — and the focus on long-term client relationships — has stayed the same. “Is being a great journalist today different than it was 40 years ago?” he asks. “Or being a great musician? It doesn’t strike me as being necessarily different, but you have to adapt to modern times.”
This thoughtfulness, as well as a fondness for a contrarian view, is typical of a top analyst, and it also elevates Hyman to his 38th first-team appearance for economic coverage in II’s 47th annual All-America Research Team.
This consistency is nearly matched in 2018 by J.P. Morgan, which once again leads the rankings with 46 analysts ranked, including 16 first-teamers. Some of those individuals will undoubtedly one day go on to join Hyman in the All-America Research Team Hall of Fame; two — Andrew Steinerman and Joseph Greff — have already.
To mark the release of the 2018 All-America Research Team, II asked some of the Hall of Famers who made first team this year to reflect on the changing nature of sell-side research, how their roles have adapted, and what the keys are to longevity in — as well as breaking into — this field.
When pressed, even Hyman has to admit that parts of his job in 2018 are vastly different than they were in 1969.
“A lot that has changed is around the distribution of research and the amount of data available,” Hyman says. The nascent industry shifted from monthly research reports to weekly, then to the instantaneousness of daily fax, but “the doors really blew off with email,” especially since it was free, he says. (Faxing cost just as much as traditional mail.)
Bernstein’s A.M. (Toni) Sacconaghi — making his 17th first-team appearance in the IT hardware and electronics manufacturing services sector — says, “When I started, salespeople were faxing research notes in the morning, and everyone gathered together in the same room for the morning meeting. Communication is much more email driven today, so there’s a more fluid and seamless distribution of information.”
The downside: It also means institutional investors are absolutely inundated with information.
“That has arguably made it more difficult for analysts and salespeople because they have to try and find a way to be heard amid that tidal wave of communication and noise,” says Sacconaghi, a senior research analyst.
His colleague at Bernstein, partner and senior analyst Ali Dibadj — who joined the Hall of Fame last year and makes an 11th first-place finish for beverage, household, and personal care products coverage — concurs that there is more data than ever. “You really have to be good at separating signal from noise,” the former electrical engineer says.
Differentiated, quality research is one way to do this, according to analysts. Recently, Hyman has started sending out two reports a day — one in the morning and one in the afternoon. “The pace is just so fast,” he says.
John Glass, the newest Hall of Fame inductee this year with a tenth first-team place in the restaurants sector, agrees: “The speed at which information flows around now is mind-boggling.”
“Quite frankly, I think it’s changed it for the worse,” continues the Morgan Stanley managing director, “because it’s taken away long-term thinking and replaced it with shorter-term.”
With the perishability of ideas very high, Glass says he focuses on three or four pieces of research a year that will, he hopes, have a longer shelf life.
“While I try to stay as abreast of all that I can — because you need to know what information is in a stock at any given time — my value-add is not coming up with that next data point,” he says. “It’s going to hopefully be a greater insight into what’s going to happen. There’s a lot that’s changed over the last 20 years, and understanding how those businesses have reacted in cycles is helpful to clients.”
The buy side has also become more demanding in terms of what it finds helpful to the investment process. “The shelf life of think pieces and near-term data points gets consumed and used in a much shorter time frame as performance is measured in shorter time frames than five or ten years ago,” says Joseph Greff, a managing director at J.P. Morgan and a 13-time first-place finisher in the gaming and lodging sector.
“Work you would have done 30 years ago is consumed on TV in 30 seconds, and so you’ve got to try to do something else to add value to clients,” Hyman echoes.
Barclays managing director Andrew Lazar believes the key role of the sell-side analyst — to cull usable insights that will assist institutional investors in making better investment decisions — has changed very little over the years.
“It's one of the things that drew me into this industry in the first place: being able to come up with truly unique, differentiated, and proprietary research. And there is always going to be a place for that in the investing world,” he says. “Those buy-siders that are able to utilize that type of information in combination with their own process, I think, are always going to have an opportunity to outperform the broader indexes over time.”
Since debuting in the survey in 2001, Lazar this year captured his 16th first-team position in food producers coverage.
Sector coverage, regions, and the client base have grown exponentially, according to Bank of America Merrill Lynch’s George Staphos.
“It was always a bit of a game of whack-a-mole to some degree, but it’s just that the board has gone from being the size of your desk to the size of a football field — and your hammer hasn’t necessarily grown,” the managing director and co-sector head in equity research says.
“At the end of the day, what we still do is forecast value, try to identify catalysts, and put that all together in a rating,” the 19-time first-team winner for the paper and packaging sector says. “That’s the core of what we do. It’s the same job; it’s just more of it.”
The rise of passive investments has had a substantial impact on active managers — not to mention their research providers. “If you’re an active manager, you have to be much more sophisticated,” Bernstein’s Dibadj says. “Your job is so much harder because you have to compete versus an advanced passive machine.”
“It used to be okay that the first read of an earnings report or a public filing was all we could help with to make our clients’ lives easier,” he continues. “But now you really need to be at the center of the ecosystem for the industry you cover. I think there’s a greater level of influence one should bring to improve the industry that you cover, versus years before.”
The passage of Regulation Fair Disclosure, or Reg FD, in 2000 also reshaped the industry by eliminating selective disclosure — thus ending the sell side’s privileged access to company information. “Obviously now [post-Reg FD] you’re in a much different environment, and I would argue a much better environment, because research now matters in a way that it didn’t matter before,” Glass says. “So there’s a lot more integrity in it, and there’s a lot more primary research that goes on.”
More recently, the EU’s revised Markets in Financial Instruments Directive, or MiFID II, has forced companies globally to meter their research consumption because they are either paying or preparing to pay directly for it.
“Maybe that’s a good thing because it raises the bar for analysts in what they need to deliver,” Bernstein’s Sacconaghi says. “Ultimately, people are more tolerant of mediocrity when it’s sort of free. When it’s coming out of their own pocket — or they have a deliberate research budget and are forced to make trade-offs — then it’s really important that analysts provide services to the buy side that are more distinctive.”
Despite a squeeze for resources, most Hall of Famers remain bullish on the career prospects of those joining the industry on the bottom floor.
However, these legends warn, they should remain clear-eyed about what it takes to ascend to the top of their field.
“I don't think there is any better job to learn finance in the world,” Dibadj says. “This is a fantastic learning job. Agnostic of the industry, this is the best way to really get a very well-rounded skill set around communication, influencing for change, and data analysis.”
Succeed and running a research franchise is like having your own business within a larger firm, says J.P. Morgan’s Greff. “It is demanding and fast-paced, requires travel, lots of writing, modeling and putting together presentations, and having a phone glued to your ear,” he says. “This is a job that gives you constant feedback — and when you get favorable feedback from a client, it is a good feeling.”
His colleague Andrew Steinerman, a managing director and a 16-time first-team winner in the business, education, and professional services sector, agrees: “I am always excited to have a chance to attract the next generation of sell-side equity research analysts. I would say that focusing on the quality of work and maintaining relevancy in the key conversations are key pillars to a successful career as a sell-side equity research analyst.”
Barclays’ Lazar believes that reasons to get into the sell side are very much the same as they were 20 years ago.
“It’s still an incredibly exciting, dynamic, and creative role that provides great opportunities to work with very intelligent, accomplished people on the buy side and management teams of the companies we follow,” he says. “The path to being a senior analyst could well evolve with the changing times, but I think the fact that it's challenging and rewarding work will remain unchanged.”