Thread by @bauhiniacapital

Someone I follow RTed or Liked or Something-ed a tweet where I clicked on the blog post and added to my tabs to read later.

A few weeks later I am getting around to it.

Am I going to get myself into trouble again?

It has to do with a post by Ben @EpsilonTheory which contains the money-quote...

"What MIFID II revealed is that sell-side research just isn’t worth much. It’s just not."

epsilontheory.com/the-most-valua…

Nota Bene: The commentary itself is about a Pensions & Investments commentary which ALSO has issues.
pionline.com/article/201906…

I wasn't sure where to start so I'll start here.

If you want to 'crib' others' work/IP then call it of no value, so be it. That's on you.

No analyst I have EVER met was born fully formed from the head of Athena w/ complete understanding of the dynamics, factors, nuances,

players/egos, etc of a given industry or company. A model is a framework on which we learn, understand possibilities, and base conclusions.

S/S analyst written work (even primers) is the beginning not the end. If a 3-10yr B/S generalist covering 50-100 stocks over 2yrs

can't learn from a 10-20yr S/S specialist covering 20 stocks for decades, B/S analyst has a problem.

B/S analyst reads primers, cribs model, then talks to noone who knows more than he/she did a few days ago, and the result is worthwhile?

As a generalist, I know someone else always knows more. As a specialist in some small corners, I know there are still those who know more. I seek them out. Many available to B/S are on the S/S.

Yes, you can D/L a no-forecast F/S or BBG model. If content with that, good luck.

w/r/t mgmt willingness to speak, they can say what they can say, and not what they can't. Rules.

Analysts are paid to read through data and between lines.

B/S is paid to use to their benefit the combined collective wisdom of others. I've ALWAYS been able to make use of S/S.

Insulting the analysis of sell-side is cute. Sell-side has to cater to investors of differing knowledge base, opinions, horizon, risk appetite, and needs with a single framework of analysis, partly so structured by reactionary regulatory expectations.

And if you get their nuanced, complex and contextually relevant opinion out of a primer, or an erns update, you are a better man than me. But go deeper with more precise parameters, and the analysis gets more relevant.

Will a S/S analyst replace a PM? No. That's not the point.

The final flippant throwaway comment is just that.

I am not sure how someone observing markets this long doesn't understand the S/S IS what has been outsourced from the buy side. It is inefficient for the buy side to have a whole S/S research department in-house. So they don't.

If B/S were better at figuring out how to efficiently use, value, and pay for external expertise, that would be great for everyone. The P&I article shows some nuance there.

This @FTAlphaville piece does better.

ftalphaville.ft.com/2019/07/04/156…

The likelihood B/S decision-makers will build a case around costs ($, time, etc) and risks of omission, and then make what they consider their optimal decision? Near zero.

It definitely means spending differently, and could easily involve spending more, not less.

Industry changes have wrought changes which increase S/S costs (regulatory), and lower S/S revenues (move to passive, Volcker Rule).

When full unbundling comes to the US, the buy side should embrace it. S/S too if they are smart.

(Tho Europe taking it on PnL was a bad idea).

Good active / semi-active should be able to thrive.

Process still matters. And expertise is where you find it. Denying that a decent chunk of the world's specialist financial markets interlocuteurs provide any value is honestly strange.

Even buy-side is sell-side to someone.

And now it's beer o'clock.

[and flame-retardant suit o'clock]

Stay thirsty my friends.

I’d note the MiFID2 ‘evidence’ sellside research is worth less is because for most, it now comes out of buyside’s mgmt fee. They panicked and went for PnL vs RPAs because some big ones did. Mistake. But it meant costs were cut everywhere. First reaction was deer-in-headlights.

If your net revenue as an asset mgr falls 15-25%, you cut costs. Regionals suffered. Top 10 generally OK b/c they provide waterfront coverage. But brokers everywhere saw the need to adapt to a new world. Funnily, 6mos in, much Buyside was trying to get more coverage back.

I personally think US is ill-prepared. Recent loosening/word change in fiduciary language was a bad idea. US should have embraced the possibilities of unbundling AND flexible RPAs.