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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Beauty pageants have their detractors. The same holds true in financial markets. Brokerage analysts in Europe have just finished their annual ritual of parading for votes on the Institutional Investor Research survey of the best research teams. Some like the rankings; many are wary of the answers. It is a flawed process that persists though no one can really explain why.
The most famous survey, from the Institutional Investor magazine, began in 1972 in the US. There were rival polls such as Extel’s in Europe. All asked investors about their favourite analysts. In 2018 Institutional Investor, by then owned by the Euromoney publishing group, bought Extel and an analyst-ranking monopoly was born.
Both analysts and fund managers claim to hate this process. That does not stop the sellside from trying any gimmick to catch the client’s eye, often using social media. On LinkedIn, one can find a recent poem by a senior Jefferies salesperson pitching for his research team. A Barclays analyst linked photos of his nuptials to a plea for 5-star votes.
Presumably these efforts have some effect. Ten polls by IIR each year — in the US, Europe/UK and Asia — find sufficient respondents. Still, everyone rightly asks what the resultant rankings mean. For example, Goldman Sachs has not ranked highly in recent European research surveys. Its equity business nevertheless remains formidable, notes a research boss at a rival bank.
IIR tries to dispel any doubts about methodology. The poll aims to give weight to the votes of clients with the largest research budgets by sense-checking which asset managers they survey with brokerages. This is meant to avoid analysts canvassing votes from numerous tiddly institutions.
In theory, there could be millions of research dollars at stake from some clients. For European equities (including the UK) the top tier of perhaps 10 to 15 institutions will spend between $10mn and $20mn on research annually. Most, though, will have budgets between $250,000 and $1mn after which follows a long tail down to the tens of thousands.
Clients generally know whom they find useful. And not every research team campaigns with quite the same cheek. Some do little or no pestering, but their analysts may receive votes nonetheless. Indeed, there seems to be no easy way to opt out of the process. Analysts may enjoy the acclaim, or use it to push for higher pay. But any decent research boss already understands which teams are popular with clients and earn their way.
The usefulness of these beauty parades may be clearest to those being ranked, rather than the clients or managers they sometimes purport to serve.