The loss of Bear Stearns, Lehman Brothers and Merrill Lynch from the ranks of independent competitors in US equity research gave a boost to smaller providers, including mid-sized and regional brokers, sector specialists and independent research providers.
However, according to the results of Greenwich Associates’ 2010 US Equity Analysts Study, the integration of these research franchises into other large organisations also aided the businesses of the remaining bulge bracket brokers who, as a group, captured a significant portion of the business freed up by market dislocations during the global crisis.
The bulge bracket has been steadily ceding “vote” in equity research to smaller competitors since 2008. As recently as 2008, bulge bracket firms captured 73.1 per cent of the research vote in US equities. In 2009 that share fell to 68.5 per cent, and in 2010 it dropped to 64.1 per cent.
Meanwhile, the share of analysts’ research vote captured by mid-sized broker-dealers, regional firms and sector specialists increased from 23.9 per cent in 2008 to 28.9 per cent in 2009 and to 32.4 per cent in 2010. After remaining flat at 2.7 per cent from 2008 to 2009, the vote captured by independent research providers increased to 3.4 per cent this year.
The shift of research vote from the bulge bracket to smaller providers mirrors a similar migratory pattern followed by some of the top analysts on the sell-side. Throughout the global market crisis, large financial institutions were forced to cut costs in their broker-dealer operations, resulting in layoffs, salary reductions and reductions in coverage. These actions spurred the departure of several top-rated equity analysts, who joined large numbers of their industry peers when they were either shown the door or decided to seek out more lucrative opportunities.
“Many of these displaced analysts found new employment with smaller broker-dealers, regional competitors, sector specialists and independent providers, with the last group including several high profile start-ups,” says Greenwich Associates consultant Jay Bennett.
Despite these notable shifts, the aggregate amount of research share flowing from the bulge bracket to other research providers since 2008 falls far short of the total share previously held by Bear Stearns, Bank of America, Merrill Lynch and Lehman Brothers, indicating that bulge bracket brokers have succeeded in retaining or capturing some of the freed-up business.
Barclays Capital has been especially effective in securing the vast bulk of the relationships and research share formerly held by Lehman Brothers, the core US assets of which were acquired by Barclays in 2008.
Also, it remains unclear whether the shift in research share away from the bulge bracket will prove sustainable over the long term. In trying to compete with industry giants, smaller research providers face structural factors that work to the advantage of their bigger rivals. Clients have an incentive to work with bulge bracket providers in research as a means of building strong relationships and benefiting from these firms’ provision of liquidity via capital commitment access to deal flow and direct access to corporate management teams.
Perhaps more importantly, much of the bulge bracket’s loss of share over the past two years has been the result of structural issues at the corporate level, as opposed to any direct breakdowns within the equity functions and research franchises of these firms. Now that the crisis has at least temporarily receded, several US bulge bracket firms have begun rebuilding depleted research franchises and hiring back top analysts. They are joined in this effort by foreign firms like Nomura, CLSA and Macquarie, which aspire to commit significant resources to the US equity research market.
Every year, Greenwich Associates names its Greenwich Share Leaders in US Equity Research based on the results of its annual ratings of research providers by buy-side analysts. Providers are ranked by their share of the US institutional “research vote,” which Greenwich Associates calculates by asking equity analysts at the buy-side institutions participating in its annual study to name the firms they use for equity research across 60 specific industry categories and then weighting those results based on the amount of US equity trade commissions the institution pays out.
Based on that methodology, the 2010 Greenwich Share Leaders in US equity research are J.P. Morgan, followed by Bank of America Merrill Lynch and then jointly third ranking Barclays Capital and Credit Suisse. Notably, only 60 basis points in share separates the jointly fourth ranking firms of (in alphabetical order) Citi, Goldman Sachs, Morgan Stanley, Sanford C. Bernstein, and UBS.
