Last years historic turmoil in the bulge bracket proved a boon to the franchises of many smaller equity research providers, including mid-sized broker/dealers, regional firms and sector specialists. Nevertheless, the 2009 list of Greenwich Associates U.S. Equity Research Leaders is dominated by large global firms, with Bank of America-Merrill Lynch placing first in terms of share and Barclays Capital, J.P. Morgan and Sanford C. Bernstein sharing top honors for overall quality.
The downfall of Bear Stearns and Lehman Brothers and the merger of Merrill Lynch by Bank of America created significant disruptions in the supply and quality of the research used by institutional investors in U.S. equities. At the start of 2008, bulge bracket firms captured approximately 73% of the U.S. buy-side analyst research vote. In 2009 that share fell to just 68.5%. That decline reversed a two-year trend in which the bulge bracket had increased its share, says Greenwich Associates consultant Jay Bennett.
Meanwhile, the share captured by mid-sized broker/dealers, regional firms and sector specialists jumped to approximately 29% in 2009 from about 24% in 2008. The gains achieved by these smaller providers did not necessarily come at the expense of individual bulge bracket research platforms, says Greenwich Associates consultant John Colon. Rather, sudden consolidation disrupted existing research relationships, some of which were recaptured by other bulge bracket firms while others were won by smaller providers and specialists.
Absent from the list of beneficiaries of these disruptions were independent research providers, which saw their share of the buy-side analyst research vote remain flat to just slightly higher at about 2.7% from 2008 to 2009. Independent research providers (IRPs) captured a growing share of the buy-side analyst vote as well as institutional commission dollars for several years following the 2003 Wall Street Research Settlement. Those gains appear to have peaked in 2006 at close to 3% of the vote, and any momentum appears to have stalled.
Based on trends we are seeing this year, it is entirely possible that the bulge bracket will continue to lose share in the buy-side analyst vote in 2009-2010 and that we will continue to see gains among mid-size, regional and specialist providers, and to perhaps a lesser extent among independents, says Greenwich Associates consultant John Feng. In particular, layoffs and compensation reductions around year-end 2008 sparked an exodus of talented analysts from bulge bracket firms, and many of them landed at smaller shops or opened their own independent firms. We assume that at least some institutional analyst relationships will follow.
D.C.