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  1. Substantive Research Latest Analyst Mapping Finds that the Research Brain Drain Has Stabilised

    Written by Nathan Hyatt | January 27, 2022

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    Brokers that reversed the research brain drain in 2021 are reaping the rewards

    London, 27 January 2021: Substantive Research, the research discovery and research spend analytics provider for the buy-side, today published findings of its latest equity Analyst Mapping study showing that the brain drain in investment research has stabilised.

    In its first Analyst Mapping report published at the end of 2020, Substantive Research found that since MiFID II came into effect, in proportionate terms, European brokers had shrunk their analyst teams at least three times more than their US counterparts. There had been a 12% loss of analysts in Europe vs a 4% loss in the US, as buy side budgets and research pricing decreased globally but more significantly in Europe. 

    In March 2021 Substantive Research released its second Analyst Mapping study, covering the movements in experience levels amongst sell side equity research analyst teams, from Jan 2018 – Dec 2020. The results painted a clear picture of a market that had undergone significant retrenchment in tenure, with nearly 7,500 years of net analyst experience lost to the market during that time period. 

    Substantive Research’s latest Analyst Mapping Report covers data spanning the first three quarters of 2021 to verify if these trends have continued, and a number of clear messages have come from the data:

    – The brain drain in investment research has rapidly decelerated in 2021, with only 296 years of net experience lost to the supply side of the market globally, compared with almost 7,500 over the previous 3 years 

    – In terms of analyst headcount, Europe has now stabilized with an increase of 1% in 2021, coupled with net 45 years of experience lost.

    – In the US, analyst team headcount decreased by 1%, with a net loss of 251 years of experience in the market.  

    – The devil is in the detail – whilst the post-MiFID II shock initially hit all providers similarly in terms of lower research payments, this is now a fragmented market where each broker is having its own unique experience in terms of its pricing power and ability to commit to quality and coverage from a cost perspective. 

    – The buy side’s research valuation processes are more rigorous now, and their remuneration for external research is much more sensitive to changes in quality and resourcing by brokers. 

    Brokers that have ridden out this deflationary period, stuck to robust pricing structures and taken the opportunity to grow teams with quality analysts are now seeing the rewards in terms of market share. Investment in attracting and retaining senior analysts has never been so correlated to broker market share, and Jefferies is a clear example of this:

    – Jefferies actually increased analyst headcount in 2019 and 2020 against the overall market trend, and kept experience levels flat across analyst teams.

    Accordingly, Jefferies jumped into the top 10 research brokers by market share in payments during 2020, and rose to 7th position during 2021 despite strong competition and significant market churn around them.

    Mike Carrodus, CEO of Substantive Research, said: 

    “In 2021 we saw broker research cost-cutting stablising overall. This has been driven by a subset of brokers retaining and hiring senior, quality analysts which has offset continued cuts among other sell side firms. The buy side’s research valuation processes have matured in the last three years and now ensure that payments quickly reflect changes in quality and breadth of coverage. They are tracking and rewarding broker commitment to investing in the sector coverage they care about most within each broker.” 

    Carrodus added: “What is also clear, is that brokers that increase both their analyst headcount and average experience levels in their teams are guaranteed to increase market share from their previous positions. However, increasing headcount without an accompanying rise in experience is not correlated with larger payments from clients.”

    The study above covers 50 firms with AUM between 30 – 800 billion USD. These firms are split 70% Europe/UK and 30% US, 80% Long Only and 20% Hedge Fund.

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