Thursday, October 11th, 2012
changing research

A year ago, I gave a presentation about sell-side research to the clients of BlueMatrix,BlueMatrix | FYI, I am not affiliated in any way with BlueMatrix.  This is the link to its website. which provides a platform for the production and distribution of research reports.  It was entitled, “The Ecosystem of Research Information is Changing,” and it was meant to be a wake-up call.

While the speech focused primarily on equity sell-side research, the revolution in information and competition is important for investment firms of all types.  For this, the start of a seriesthe research puzzle | This index of the postings will be updated as the series progresses. about the state of equity research in 2012, a look back at that presentation provides a nice entry point to some of the topics at hand.

The summary text of the presentation is available onlinethe research puzzle | As indicated in the summary, I delivered my remarks without a slide deck.  (Horrors!) and includes links to additional material.  (Since I’m quoting myself, I have left quotes out of this posting, even if I use the same words.)

The talk was about the intersection of a few important ideas:

Good research isn’t just found on the Street.  Sell-side research is no longer the only game in town.  It’s cheap or free to get information these days and it’s cheap or free to disseminate ideas, as the thriving community of investors on Twitter and in the finance blogosphere demonstrate.

The quality of the work ranges, as you can imagine, from excellent to laughable, but it's no longer the case that you can assume that what's widely available is not “professional grade.”  Very often it is written by seasoned professionals.

The Street also faces competition from hundreds of independent research firms, the below-the-radar (but very well financed) research offerings of Bloomberg Industries, and lone wolfs like Carson Block that can move the market more than any sell-side analyst.research puzzle pix | Block had just been named one of Bloomberg’s fifty most influential people in the business before the presentation.  Only two in the audience of more than a hundred knew who he was.  Attached is chart about Block I did a few days later.

The research report as we know it is a relic.  Over the last couple of decades, we've had a communications revolution, digitization has destroyed entire industries, the investment business has new players, there are more research providers with new channels of distribution, and investment information has gotten more democratic and more social.

What has happened to sell-side research reports during that time?  Nothing much.  How is that possible?

Regulation can be used as an excuse for the lack of progress, and there is a little something to that excuse, but it’s pretty flimsy.  The reports are “frozen in time,”the research puzzle | That was the title of a posting about research reports that I did in 2009. in concept and structure, with worse graphics and production standards than when I entered the business almost thirty years ago.  Surely someone will rethink this tired model.  (OK, I’ve done that part; now someone has to be willing to be bold.)

The focus of sell-side research is all wrong.  When institutional investors are surveyed about what they want from the Street, “the big three” of recommendations, estimates, and target prices come out near the bottom.  Yet those are the things that the research product is built upon.  More than five hundred academic studies have parsed those three activities — and the forecasts are the focus of media attention and investor derision.  Sell-side analysts spend too much of their time creating and defending relatively unimportant single-point numbers and ratings rather than building and conveying unique ways of considering opportunities.

Some questions.  To the firms that produce the research:

Who is your audience?

How do you add value?  How can you add value?

What's the purpose of research in your business model?  What will it be five years from now, given the changing ecosystem?

How can you stay relevant?

You might keep in mind that the customers of your research are for the most part wholly unsuited to the task of imagining what research will be or should be.  They’ll respond to a helpful new way of presenting information when it’s shown to them or find value in a remaking of the traditional roles of an analyst, but they’ll not see the need for it before you step out from the faceless crowd on the Street with some real alternatives.

You must differentiate your work and create research that represents the unique nature of your firm and your approach, not something that is a fill-in-the-box exercise.  It must help clients to make good investment decisions and be positioned to reflect and take advantage of the changing information flows of our world.

The firms that succeed going forward will need to be bold to compete in a different world.  There are big changes going on — and sell-side research can no longer avoid them.