- - Thursday, June 30, 2011


There are a number of commonalities when managing money — be it as an institutional portfolio manager, a registered investment adviser, a financial planner or a self-directed investor. These include picking investments that one thinks will generate favorable results, a cost-competitive platform on which to execute those investment transactions, and the need for copious amounts of information to test and retest their investment thesis.

While there are a number of resources investors can use to glean insight on an industry and companies that compete in that industry, a time-tested source of insight has been research reports issued by sell-side research firms.

For those unfamiliar with the term, a sell-side research firm is one that sells investment services to asset management firms, typically referred to as the “buy side.” These services encompass a broad range of activities, including brokering/dealing, investment banking, advisory functions and investment research. Sell-side firms employ research analysts, traders and sales people who look to generate ideas and execute trades for money management firms. The job of a sell-side research analyst includes publishing research reports on public companies. These reports analyze the businesses and provide recommendations on the purchase or sale of the stock.

Naturally, one would assume that portfolio managers would gravitate toward the recommendations issued by these sell-side firms, such as Goldman Sachs, Morgan Stanley, Bank of America/Merrill Lynch and a host of others.

It may come as a bit of a surprise to some, but while Wall Street still looks to what these sell-side research analysts are saying, it is paying less attention than it was a few years ago.

According to a recent study by investment consulting firm Greenwich Associates, buy-side investors believe that the value of the service traditionally provided by sell-side analysts has fallen in 2011 for the second consecutive year — to less than one-quarter of the overall commission pie that is paid out for research. Not only is that piece of the pie shrinking, but the overall commission pie has been getting smaller as well. To be fair, trading commissions across Wall Street have been squeezed in recent years and tepid volumes over the past several quarters have only made it more challenging.

While there are likely a number of reasons for why the buy side is less enamored with sell-side research analysis, one sticks out among others. For that, let’s turn to LinkedIn Corp., a company that recently went public and operates the world’s largest professional network on the Internet with more than 100 million members in more than 200 countries.

Four firms that underwrote the LinkedIn IPO at $45 share — UBS, J.P. Morgan Chase & Co., Morgan Stanley and Bank of America/Merrill Lynch — recently published research recommendations with “buy” ratings on LinkedIn shares with price targets between $85 and $92. By comparison, when LinkedIn began the process of selling its shares, the initial price during the roadshow was $30.

Others that did not participate on the underwriting transaction have taken more skeptical views of LinkedIn shares. For example, earlier this month Evercore Partners started coverage of LinkedIn with a neutral stance given valuation concerns, saying much of the business opportunity is already priced in the current share price. The overly bullish perspective of the underwriters have led many to wonder if we didn’t step into a time machine to Wall Street circa 1999.

Why is this important to the individual investor?

If the largest buyers of research materials are reallocating their dollars away from sell-side research, then self-directed investors also should be looking at research and information that is not the typical “buy” or “hold” generated by large Wall Street firms. Is sell-side research a useful tool when balanced with other sources? It is, but it sure isn’t a silver bullet on its own.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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