The role of the analyst is not what it used to be. Changes in business models, advancements in technology, and cost pressures — not to mention new regulations coming down the pike — have all taken their toll on the profession. Today’s job market is more competitive than ever, and reaching the top requires a different skill set than was expected of previous generations of analysts.
Outsourcing has been a major trend in most industry sectors for many years. From manufacturing to financial services, thousands of jobs have been exported overseas. Nowadays, it is common for asset managers to outsource back-office and administrative functions to large banks, which then outsource the work to lower-wage markets. For analysts, that means some modelling work and listening to quarterly phone calls is being done in places where a lower rate of compensation gives analysts a cost advantage over analysts in major financial centres.
“That is an issue when you look at the demographics of the business, where jobs are being created, and how young people will get their experience. Analysts are competing against a global talent pool these days,” says Owen Concannon, CFA, senior vice president and research director at Neuberger Berman in New York and author of CFA Institute Industry Guide The Asset Management Industry.
Another trend is that the flow of money into passive index products with lower fees has increased substantially, coming at the expense of actively managed funds that rely on fundamental research. Morningstar’s 2015 Global Asset Flows Report shows that US index funds attracted about $400 billion of inflows, compared with an outflow of more than $200 million from actively managed funds. The percentage of US equity assets in passive funds reached 37.5% in 2015, up from less than 20% in 2007.
In addition, advances in technology and new regulations are forcing analysts to redefine their value proposition. A couple decades ago, “good” analysts would quickly call their clients when they had new information, building relationships over time the salespeople could then leverage to extract orders. Today, market participants already have near-real-time access to a vast amount of information via the Internet, so a portion of the traditional service offering has become redundant. Further, the Markets in Financial Instruments Directive (MiFID II), which takes effect for EU member states in January 2018, will require research to be unbundled from trading commissions—and some observers believe US regulators will follow suit. The cost of research will soon increasingly come out of the asset management firm’s P&L instead of out of their clients’ funds.
“The days when soft dollars were so much easier to come by are pretty much over. That has huge ramifications for the job market,” says Marietta Miemietz, CFA, a pharmaceutical analyst who is co-founder and director of Primavenue Advisory Services in London. “Analysts no longer need an investment banking platform to take clients’ commissions and run broker voting. An asset manager can just go to a research house and say, ‘OK, we’ll pay you x for providing us with research,’” adds Miemietz, who is also the author of CFA Institute Industry Guide The Pharmaceutical Industry.
About a decade ago, brokers started lumping together content origination and distribution because it was easier to monetize road shows, huge conferences, and calls with experts. They even began paying juniors to sit in front at medical meetings and take pictures of the slides that were being presented.
“For an analyst, that is quite frustrating because your role is no longer to come up with insightful research. It is just to facilitate interactions between asset managers and various management teams of experts,” Miemietz says. “That is also going to stop.”
Asset managers may have other reasons for wanting to pay for things like road shows, she admits, but the cost will probably have to come out of their own pocket, and such expenditures cannot be labelled as research.
Ultimately, MiFID II is a catalyst for changes that are already underway. In the past several years, there has been greater discordance between what asset managers want and what the research industry actually supplies. Pricing pressure is forcing brokers to take costs out of the system. It has gotten to the point where the brokers are not making money and the buy side thinks that what the sell side is doing is not useful. In Miemietz’s opinion, it was a mistake for the sell side to concentrate on trying to come up with great stock calls instead of supplying intelligence that would enable clients to make their own decisions.
There is a good chance that the buy side will increasingly conduct more research in-house. That said, some research houses will likely be successful, among them those that hire brilliant analysts to do in-depth research. Global houses that cover all sectors will continue to attract large asset management firms as clients, but the analysts will have to offer value relative to their cost. Finally, there will always be some demand for paid-for research, especially in the small-cap space, but these providers will need to hire analysts cheaply.
“The job markets are going to become more favourable for senior analysts and probably a little bit scary for the mid-level analysts,” Miemietz predicts. “It has been quite hard for the senior analysts to justify to their employer that their work can be monetized, but the pendulum is swinging the other way.”
There is also an opportunity for senior analysts to build their own firms, because they no longer need the investment banking platform. Some may find that an attractive alternative given the potential for financial gain and job satisfaction.
Strong research, material insight
Going forward, investors who are paying for research will expect analysts to have a much more in-depth understanding of the drivers and variables that influence their sector. Firms are already seeking to hire analysts who are industry insiders and practitioners.
“Investors are asking for more,” says Irfan Younus, CFA, analyst in the real estate sector, head of research and strategy (Europe) at Savills Investment Management in London, and author of CFA Institute Industry Guide The REIT Industry. “They are looking for that unique understanding of what is driving the market rather than reactively describing what is happening in the market.”
Analysts need to be able to incorporate the effects of global trends, events, and regulations into their assessments. When the US Federal Reserve makes a decision about interest rates or China changes its overseas investment rules, for example, Younus has to estimate the potential impact on the European property market.
He believes that analysts who want to succeed will need to continually improve their quantitative skills. Though the CFA Program is a good foundation for analysts, it is also important to learn how to use software tools, such as MATLAB and IBM SPSS, for doing quantitative analysis.
“You need to be constantly analysing a very wide range of data,” he says. “It’s also not possible to just rely on spreadsheets. You need to have better statistical tools to work with.”
Concannon agrees that familiarity with technology and programming skills is essential because data volumes need to be managed. Analysts have a huge amount of structured and unstructured data sources at their disposal, so they need to not only understand what information is available and important but also to be able to obtain it and digest it quickly.
“At the end of the day, the job is going to go back to its roots of having strong fundamental research being backed by smart opinions,” Concannon says. “With so much information out there, the challenge is going to be how to de-clutter it and focus on things that are material.”
Read part two of this article