Commentary

Joanna Fields
Traders Magazine Online News

Navigating Cybersecurity on a Stretch of "Regulatory Rapids"

In this shared commentary, Aplomb Strategies writes that when considering a firm’s governance structure, a holistic approach makes the most sense.

Traders Poll

Would you feel better if the Chicago Stock Exchange were purchased by U.S. firm or consortium rather than a foreign one?

Yes

73%

No

4%

Doesn't matter to me

23%

Free Site Registration

January 1, 2001

Kicking Sellside Research Habbit: Buyside Longs for More Independent Thinking

By Laura Santini üInvestment Dealers' Digest

Fund companies are using more in-house research, relying less on tips provided by sellside firms, which were paid in kind with order flow.

Fund companies are growing exasperated by what they say is the obvious conflict of interest among Wall Street analysts whose firms operate strong investment banking franchises.

"When Wall Street research departments talk about the objective quality of their research, I have to laugh, or cry, because it just doesn't exist," said Bernie Picchi, head of research at Federated Investors.

Picchi has first-hand knowledge of the inner workings of Street research: before he joined Federated last year, he spent two decades on the sellside covering oil companies and headed up equity research at Lehman Brothers for a time.

Funds' Analysts

Federated slowly but steadily has been adding analysts in the past 12 months and plans to keep staffing up its research department. In addition, Dreyfus Corp. and possibly Putnam Investments, apparently also want to increase the number of analysts and sectors covered within their research departments. A Putnam spokeswoman did not provide comment by press time.

The crux of the problem between the funds and Wall Street is the growing commoditization of Street research. According to Picchi and others who have spoken out against Street research in recent years, investment banks now regularly use analysts as part of their marketing pitch to corporate America.

Some firms about a year ago began including mock analyst reports in their pitch books to potential issuers, and analyst compensation is widely known to be linked to the amount of investment banking business each analyst helps generate.

Hence, at the outset of the boom in telecom initial public offerings, Jack Grubman-arguably the most high-profile Wall Street analyst in the sector-was offered an eye-popping salary of $25 million plus a bonus to stay at Salomon Smith Barney for two years.

Fund companies are yearning for independent thinking. One of Federated's portfolio managers, for instance, in selecting stocks, has a requirement that a company not be covered by a Wall Street analyst. Behind this stricture is the sense at the firm that it is easier to conduct research independently if Wall Street has not had its say.

Regulation FD

What is also driving fund companies' desire to rely less on Wall Street research is Regulation FD. That compels public companies to disseminate market-moving information equally among buyside and sellside analysts.

The rule has sent shock waves through research departments, as analysts have noted some companies are reluctant to provide information that would have been routine before the rule's passage.

"Reg. FD puts more onus on the buy-side community to have its own people in place," said Larry Lawler, head of trading at Dreyfus.

Buyside and sellside officials said analysts will have to return to "the basics" of conducting research, meaning that analysts will have to develop sources inside the companies they cover from which they may glean unique insights about the business.

For this reason, John Wheeler, head of trading at American Century Investment Company, said buyside firms now stand to benefit even more from proprietary research.

Rather than have a brokerage analyst pass on information that may or may not fall under the rule's disclosure requirement, a fund company's own analysts could mobilize to eke out insights about public companies, which would then be passed to portfolio managers and traders within the firm.