READ NOW: Singletrack Quarterly Benchmark Report Q1 2024

Back to the future: the evolving role of the research analyst

Insights

  • Current market conditions, while unfamiliar for those scanning the past decade, represent a return to a more normal state
  • Increased volatility and recissionary risk have a  big impact on the importance of research and the future of the analyst role
  • In particular, the ways in which research content is created, packaged and delivered will need to change to improve how insights are discovered and integrated to improve investment outcomes
  • Long-form reports are an artefact of regulation, not the way analysts really want to consume research
  • The biggest impact of AI on the research analyst will be in producing content efficiently in the formats required
  • While remote working is here to stay, firms must find a way to adapt the traditional apprenticeship model to train great analysts

Rod Hall is a former top-ranked equity analyst with more than 20 years’ experience working in both London and New York with firms such as JP Morgan and Goldman Sachs. During his career, Rod specialised in covering hardware and infrastructure technology.

Recently Rod sat down with Singletrack CSO Brijesh Malkan in the second of our Banker2030 interviews to discuss the current state of the investment research industry, and in particular the way in which market changes will impact research in the future.

BM: over your 20-year career in investment research, what were the biggest changes you saw?

RH: that’s a hard question! A few things come to mind. From a regulatory point of view there was a change in access to information. When I started we were brokers to companies in the UK, we had, probably, an unfair informational advantage because we had relationships with these companies and with senior management. But that has largely been regulated away. 

The technological environment changed a lot as well. Towards the end of my career, we were doing a lot of data science work on my team. We were leaders in that. But that was definitely not a thing back when I started. I’ve seen it develop to become as important as Excel for analysis. 

The nature of markets is now changing. When I started it was harder to make money because we were in a more normal interest rate environment. So the quality of people in equity research both on the buy and sell sides was quite high. And then it became easier and easier to make money because everything was going up. And now all of a sudden we’re back to a more normal interest rate environment. I think a lot of people will get washed out and the next wave will take a more rigorous analytic approach. Active investment will become much more valuable. 

BM: what does the analyst of the future look like? 

RH: the skill set that you need hasn’t changed. Data science is just another type of information that’s available to you, and it only gives you a tiny extra edge. In fact, it turns out that smart analysis, reading financial statements, forensic accounting, industry knowledge – the basics – yield an awful lot of value as well. Nowadays, data science is like Excel: you need to be able to do it.

BM: research production itself hasn’t changed much over the past 30 years. You write a report, it’s a long-form piece of content. Will that change? 

RH: I think that comes down to the type of people consuming research. And if you think about younger people starting now, they don’t consume written research. Look at what they consume – it’s shorter form content, often video. I had training for CNBC at Goldman. Ten years ago, CNBC spots were two minutes long. They’re now a minute and a half. Attention spans are shortening. 

But long form research reports aren’t a good fit for anyone. During my career, I agitated for more presentation-oriented reports as a first step. People don’t have time. 

The issue was always regulation and cost. Let’s talk about what I would see as a modern research platform, and then we’ll talk about why that isn’t happening. Modern research would be like Tweeting: I’m using social media to let you know I have something new, I then want to let you double click to as much detail as you want. It’s backed up with analysis but it’s presented visually. I’m never writing a long research report. 

I think long-form reports are a consequence of the regulatory environment, and an unwillingness to spend money on new platforms. Now that philosophy will probably change too, because the value of good research has been deteriorating for 20 years due to our interest rate environment. In the environment we’ve seen, what’s a research analyst good for at an investment bank? You want someone who can go out and do IPOs and maintain positivity on everything. But in a normal interest rate environment, you want someone who can add value to the buy side because that active investor is much more important. I hope, and maybe this is wishful thinking, money will flow out of ETFs back into active investing a little bit more. 

BM: in the future, do you think the banks will still dominate research? I mean, could something like Google become the investment research business?

RH: no, I don’t think so. Why would Google want that? This gets into a bigger question of whether investment banks make sense in the future. You’ve seen automated IPOs already. But I think there’s always going to be a place for expert advice from high quality providers like Goldman and J.P. Morgan.

But will those people work in centralised organisations, or will they be consultants operating on their own? I don’t think that there’s a real economic model there for individual practitioners, so probably it remains a cost element that rides on top of an investment banking business and or investment advisory business. Otherwise advisory research would go away and you’d just have research sitting inside of buy side firms.The problem the buy side has is that they have historically over-rated their ability to surface new ideas. It’s much easier when you have multiple sell side analysts trying to feed you every bit of data they come across. Not all buy siders are ignorant of this but many are. It’s easy to become arrogant when everything you touch turns to gold regardless of your skill. 

BM: that’s the value of the analyst, right?

Rod: the sell side has always offered a competitive market for information and analysis. Buy siders compete via market returns, but returns have been so easy to generate that many over-rate their own skill. In fairness, this isn’t 100% true. Some platforms brutally assess alpha and are incredibly unforgiving so I’m not talking about those places. 

BM: one of the big things that’s changed over the past 20 years is what we mean when we talk about the buy side. Traditionally, we’re talking about institutional, active managers. But now, we’ve seen fund flow from institutional to wealth, to hedge funds, to more passive funds. Do you think the research analyst of the future needs to reconsider their product? 

RH: for hedge funds and PE, you have to think about everything in the context of leverage. Leverage has been free. In a free leverage world where returns are easy to make, why not just lever everything? As we return to a more normal state, I think it will be much less dominated by those kinds of vehicles. Warren Buffet was basically the original hedge fund manager, right? So I think if we see a shift towards a more normal interest rate environment, then we’ll probably see a shift back towards long-only fundamentals based investing. 

BM: what will the research product look like in that case? Do you expect it to change because the TikTok generation of PMs are going to want different content? 

RH: how people consume content has changed radically. But the market always decides. If you have a market and the market is rational – which it hasn’t been – then you’d better have good analysis and good research and that’ll be exactly the same thing as what we had 20 years ago. The format might change, but the content won’t.

BM: what advice would you give a new research analyst coming fresh out of business school today?

RH: Find someone who knows how to do good fundamental analysis and learn from them. There are a lot of people working at the moment who have never been trained in those skills themselves and over-rate their own skill, so a mentor could be hard to find. But it’s essential.

BM: Now that everyone’s working from home, will the traditional apprentice model of the research business change? 

RH: I think you’re going to have to be in the office. New joiners I hired during the pandemic have told me they believe that the office interaction was crucial. It’s that indirect ability to overhear a conversation. I don’t see any technological way to achieve that. I think you’re going to have to have hybrid working, because nobody wants to go to an office five days a week anymore. We played around with Meta devices and we tried to have meetings with them and while we didn’t find it effective yet, we felt that if we had a better device we might operate in a virtual environment. Apple’s Vision Pro is now much better but this ability to interact in a virtual environment in the same way you do in an office still hasn’t been figured out. 

BM: there’s now a lot of data available. Firms can track who’s opened emails, who’s read reports, etc. Which data points are most valuable?

RH: Knowing what people are interested in is crucial. The market is smart. If you create something and it gets a lot of hits, then you’ll want to do more work in that area. Especially if you do something unique. During my career, I would have to find out by feel, unscientifically, what people were interested in. So having that on a dashboard would be invaluable. 

BM: you’ve mentioned AI a couple of times – where do you see it really making a difference? 

RH: AI isn’t very good for analysis. I asked ChatGPT to write a report on Apple in Rod Hall’s style. It mimicked my style, but the quality  of the report was poor. You wouldn’t be able to invest anything based on it. If I were an analyst now, I’d use AI to generate text from slides. I wouldn’t have my highly-paid, super smart associates writing text nobody will read. I’d put them on more actual analysis. 

BM: it sounds like there are exciting times ahead for both the analyst and the industry as a whole. You’ve given me more of a bullish outlook on the macros than I’ve had previously. 

RH: I’m a student of economic history and yes, we’re in a terrible time right now and it’s probably going to get a lot worse before it gets better. But these times don’t tend to last very long. The world never really ends. There’s opportunity in the volatility. There’s huge opportunity. 

BM: Thank’s Rod – completely agree. And that is an exciting point to end our chat on. Thank you so much for your time and sharing your insights on the future of research. While not certain, certainly exciting.

To learn more, get in touch now.

Singletrack

Singletrack

Published: 22/03/2024