Why Sell-Side Research Matters Now More Than Ever
The buy side and the sell side operate independently but are highly dependent on each other. Of the two, the challenging market conditions are hitting the buy side particularly hard as companies try to navigate a stormy sea of declining assets, slowing revenues, tighter margins, and the ongoing effects of the move away from active strategies in favor of passive.
There are also more market participants and viewpoints than ever, and for buy-side firms with very full plates, the integral process of conducting research is getting more complex and demanding. While some buy-side CIOs have long been reluctant to let sell-side research over-influence their analysts, the fact remains that the number of inputs and assessable investment opportunities to develop and test are only growing, and this is where the sell side shines.
Buy Side vs. Sell Side
When it comes to the $100 trillion-plus investment management industry, the buy side and the sell side are inextricably linked. Markets simply would not exist without both performing their crucial functions every day.
The buy side consists of pension funds, mutual funds, hedge funds, and insurance companies that buy securities to manage on behalf of others, and in the process leverage the market-making, underwriting, and advisory services activities provided by the sell side.
The sell side is comprised largely of the brokerage firms and investment banks that create, promote, research, and sell those securities, including stocks, bonds, alternatives, FX, and other solutions. Sell-side firms facilitate fundraising, provide liquidity, execute trades, conduct research, and provide advisory services to companies involved in M&A or corporate restructurings. The sell side also makes key contributions to price discovery–the process of determining fair value–by narrowing the bid-ask spreads and the gap between buyers and sellers.
The Sell Side’s Advantage: Details, Details, Details
But it is research where the sell side can add value now. Given all the above, buy-side firms need to budget their time and resources wisely between managing existing clients, developing new business, and conducting the level of investment research necessary to uncover those coveted outliers. That last one is getting trickier as buy-side firms continue to tighten their research budgets. Sell-side research augments existing capabilities by providing deeper coverage of companies, industries, and evolving trends and topics.
“The job of an investment manager every day is to identify the best possible opportunities that can benefit their stakeholders. Doing that well comes down to understanding the market view on a particular security or company. Every data point, every formula, every share price is shaped by what a lot of different people think. Sell-side research, with its access to both buy-side firms and corporates, is centrally positioned to aggregate and synthesize these insights to help managers make better-informed decisions.” – Scott Rosen, Founder and CRIO, Visible Alpha
The sell side’s strength lies in the broad network of buy-side firms and companies it can tap into, and its ability to aggregate and summarize information gleaned to help managers make good investment decisions. Consider it one more set of many eyes. The research delves deep and also generates detailed forward-looking estimates, another important tool in the arsenal. The process generally focuses on these key drivers:
- Company fundamentals – including financial statement analysis, the development of valuation models, and comparable company research
- Company “technical” – analysis of historical data to detect patterns and forecast future market movements
- Industries and markets – evaluating trends within specific industries to help investors better understand core and peripheral market dynamics and consider any surprise macro factors that could influence decisions
Sell-side research aggregates information and data through several key methods – including financial modeling, company management insights, industry/sector analysis, and expert networks – and then consolidates these inputs to develop research reports that encompass business updates, competitive analysis, and financial projections.
Why Sell-Side Research Now?
Sell-side equity research is an omnipresent value add for investment managers that can be particularly effective in business environments like these, where gaining a competitive edge is getting harder by the minute. One of those edges is knowing what others are thinking and doing, and while buy-side managers and analysts have lots of draws on their time, sell-side analysts are exclusively focused on research and talking to as many market players as possible to form the story.
Some CIOs downplay the importance of sell-side research, in many cases because they do not want their managers to be too heavily influenced by one source. But there is a reason why 90% of all sell-side equity research produced today is consumed by professional investment managers.1 Successful investing is about seeing what others miss, and the more sets of eyes the better. High-quality, granular information helps buy-side firms see beyond the headlines to find those potential outliers and make better-informed decisions.
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