Insights and inflection points: the enduring value of sell-side research

In a financial industry that is rapidly and continuously evolving, “the core value add of sell-side research has remained in place for the 60 years we have been in business,” says Colin McGranahan, Head of US Research at Bernstein, the equity research and cash equities joint venture between Societe Generale and Alliance Bernstein.

Globally, there are some 50,000 publicly traded companies of any size and 2,000 to 3,000 asset managers of any size, adds his colleague Michael Parker, Head of EMEA & APAC Research at Bernstein. “This means there will always be a role for a third-party research provider to help the one understand the other.” 

How research is created, consumed and financed may be changing, they argue, but the fundamental value proposition is solid – the threats to research always loom large but are never existential.

Deep and differentiated

That value is based on generating deep, differentiated and contextual insights into sectors and individual companies. The best analysts understand not only the company they are studying but also the ecosystem in which it operates. They can deal with complexity and recognize inflection points. 

By combining domain expertise in an industry with knowledge of capital markets and valuation, says Mr. Parker, they can spot, for example, a new class of drugs such as the anti-obesity medicines years before regulatory approval – and then model their financial impact. By working in global teams, analysts can make sure their clients are not just aware of the potential of specific companies or an entire sector like AI, but also of the threats that are posed to each.

Given the rise of cheap, passive investing, those active managers that remain, be they long-only, sovereign wealth or hedge funds, need a competitive advantage more than ever. “Active managers have to generate alpha to stay in business,” observes Mr. McGranahan, “and they need insight in order to generate alpha.”

The person ideally placed to produce those nuggets is what might be termed the ‘flywheel analyst’, a researcher who is networked both forwards and backwards in an industry; someone who everyone talks to because he or she talks to everyone – where each conversation adds value to the next conversation. AI cannot do this and even the best-connected buy side analysts or portfolio managers do not have the time or knowledge to understand a sector in sufficient depth. 

Relationships count

But the buy side will want to consult with a well-connected, astute sell side analyst and become part of the conversation. As Mr McGranahan likes to say: “Bernstein is not in the research business; we are in the client service business. The point of every research note is to spark a conversation.”

Institutionally, this translates into the corporate access model. Investment banks and brokers can and do organize conferences and investment roadshows where buy side investors can meet corporates on a scale they could not arrange themselves – and yet still grab a few minutes of private or near-private time to ask senior management their most pressing questions. At Bernstein’s iconic annual Strategic Decision Conference in New York, over 1,000 investors rub shoulders with executives from more than 100 listed companies. 

Telling the equity story

The research program is also critical from the perspective of corporate clients who want to tell their story and find an efficient way of gaining and holding investor attention. “Sell-side research is an essential component of capital flows,” argues Krzysztof Walenczak, Head of Investment Banking at Societe Generale Americas, 

“The buyside greatly values equity research in making investment decisions,” notes Jeff Mortara, Global Co-Head of Equity Capital Markets at Societe Generale. “Bernstein has a stellar reputation for research that is well-recognized by clients.”

Following the formation of the Bernstein joint venture, Societe Generale expanded its equity capital markets footprint in the Technology, Media and Telecom (TMT) sector – a sector that has traditionally been highly active in equity transactions - by opening an office in Menlo Park, the heart of Silicon Valley.

Productivity is not the only punchline

While AI chatbots cannot shake hands, there is no doubt they will impact the research business. Bernstein’s experts expect the value of the conventional results note will go to zero and may become produced automatically where required for regulatory reasons. In due course, events such as a capital markets day may become obsolete as well, since AI algorithms can collate and spread this information more quickly and efficiently than sell-side analysts. 

Whether AI tools will end up replacing jobs or allow research teams to raise productivity and cover more stocks is not yet clear. The buy side is investing heavily in AI too, so it may take on more basic screening and research tasks. Meanwhile, younger portfolio managers may prefer watching an AI-generated summary or video of a 100-page research report rather than plowing through the full written version as their predecessors have. 

Nevertheless, it will be almost impossible to replace the specialists who are the core of Bernstein’s differentiated model: experts with years of industry knowledge; a broad network of contacts; and, an understanding of valuation and markets. Clients are not asking for simple extrapolations of financial models -- which AI can provide -- but for help in recognizing changes of direction. As Mr Parker says: “AI remains bad at forecasting and at telling jokes. And our clients ideally want both.” There is hope for human analysts yet.