Wall Street Analysts’ Ways Must Change: Portfolio Managers
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

In the wake of the global research settlement with New York Attorney General Eliot Spitzer and the SEC’s fair disclosure act, Wall Street’s analysts are angering clients and putting their entire profession in jeopardy by dragging their feet on making needed changes in their research methods, say portfolio managers.
The SEC’s fair disclosure act – which first began to be vigorously enforced last year – bans companies from sharing tips with researchers, once a prime source of analysts’ value. Also, publishing corporate earnings projections – another once-important service – is virtually useless now since money managers often have their own analysts, said portfolio managers and ex-research analysts.
As a result, the research analyst, as Wall Street has defined the profession for decades, is coming to an end, said hedge fund manager and author Andy Kessler. Mr. Kessler, who wrote a book about his experience as a semiconductor analyst at Morgan Stanley and PaineWebber called “Wall Street Meat,” said that analysts are going to have to become “old-fashioned stock pickers.” He said, “No one cares what they think about their sector since each company has its own attributes.”
He said that analyst-portfolio manager meetings in the future will be limited to two topics: the best company to own in a sector and the best company to short or sell.
Mr. Kessler said that with the volume of trading commissions down two-thirds since 2000, the only value analysts can add to an actively trading manager is to identify companies that have some unique edge that others simply do not have. “Or,” he said, “to identify those companies that simply do not possess an edge and that I should be shorting.” If analysts cannot adapt to this, Wall Street firms will begin to radically reduce their research head counts.
These clients told The New York Sun that research analysts must become shoe-leather investigators of company stocks and their products, ferreting out potential trouble spots or unseen opportunities.
But Wall Street’s research departments are still organized as if it were 1998, said a hedge fund manager and former Morgan Stanley analyst, David Jackson. He said that with one senior analyst and two junior analysts covering sectors of up to a dozen large companies, there is no way they can plausibly provide a detailed analysis of the factors influencing companies’ earnings. Nor can they acquire proprietary information to leak to important clients.
“The dirty secret of Wall Street research is that many portfolio managers never cared about ratings changes. They cared about what the company’s CFO told you in the hallway at the big conference Morgan Stanley would have every year,” Mr. Jackson said. He said that in traveling the globe to meet clients big and small, the only thing most cared about was what nonpublic information he had acquired about stocks he covered.
The SEC put in place Regulation FD – Fair Disclosure – in October 2000. It prohibits executives from sharing important information with just a select group of analysts or investors.
Moreover, equity hedge funds, the most active trading clients of Wall Street, are suffering through a sharp performance drop this year, with Hedgefund.net’s index of 846 long/short equity funds reporting a 2.91% gain this year, down from last year’s 20.45% average return.
Mr. Jackson, who also runs a hedge fund Web log called Seeking Alpha, said that for hedge funds, the costs associated with paying for stock research they don’t use can hurt their performance. He said that an active $1 billion fund that pays 3 cents a share for several hundred trades monthly is easily removing 30 basis points a month in performance, or 3.6% annually, due to the commissions it paid Wall Street. “In a year where an extra 1% of return sets a manager apart from the pack, I’m seeing more funds demand commissions lowered because they want nothing to do with research,” he said.
However, those stock-trading commissions are the only revenues Wall Street dealers can use to directly compensate analysts. The global research settlement forbids investment-banking revenues being used to pay them. Stock-trading revenues are down this year by up to 20% a firm, said Credit-Sights’ David Hendler. He said that Morgan Stanley and Goldman Sachs have recently told analysts that their investment-banking “pipelines” for stock issuance look weak into next year, leading him to predict that secondary equity-trading flows would continue to suffer.
And what trading flows there are for Wall Street are frequently going to independent exchanges, such as Archipelago and Instinet, where trading is anonymous and commissions for large capitalization stocks are under 2 cents a share.
“The time of the ‘sage analyst’ is gone,” said Majestic Research’s Seth Goldstein, an independent data analysis firm for money managers. “There is just too much information out there and the playing field has been leveled by regulators.”