More than ten years ago, when the UK’s Big Bang erupted, the heavyweight US investment houses tried to muscle their way onto the UK corporate scene, offering a dazzling array of products. Their efforts received mixed reviews but they remained determined to make inroads into the market. They toned down their style, adapted to new settings, poured in even more resources and slowly started to win spots on those coveted league tables.
This is especially true when looking at investment research. Institutional Investor’s top ten 1997 all-Europe research team list now includes three American houses – Merrill Lynch, Goldman Sachs and Morgan Stanley, and the first two each moved up a rung from the previous year. As for global analysis – where the research game is heading – the large US houses dominate.
Although it is too early to assess the impact of the recent wave of powerhouse consolidations, ‘The trend that we are seeing in all the larger security houses is the Americanization of research,’ says Bob Haville, director of research marketing for Merrill Lynch, which has 500 global analysts looking after 3,900 stocks. ‘It is becoming much more quantitative, model-driven and less textual. The European influence is there but it can be found more in the style and design of the product than in the content,’ says the British born Haville who has also worked for UK-based financial firms.
Talking & teaching Geoffrey Osmint, consultant editor of the annual Extel survey of investment analysts in the UK, believes the main differences between the two cultures lie not just in the technical analysis but also in communication skills, education and training. ‘Although it is changing, US analysts are still more financially stringent,’ he says. ‘Where they have really added value is in their ability to hold a constructive dialogue with companies as well as their clients. When they visit a company, they don’t just talk to the CEO but the line managers and employees as well. Also, analysts in the UK have been slow to catch on to the fact that they must phone clients and tell their story. It doesn’t matter how good the written material is. You’re not adding value if you can’t communicate it.’
US analysts also tend to be better qualified and well-versed in the jargon of investment research language before they even set foot in an office. Osmint traces these divisions back to the days when analysts in the UK were called statisticians and sat in back rooms scribbling reports. They were often not treated as an integral part of the firm nor paid accordingly. As a result, less priority was placed on the nature of their academic qualifications. This, too, is changing rapidly and a finance-related degree is increasingly becoming a requirement. But up until a few years ago it wasn’t uncommon to find someone from an arts background – albeit with a little extra training – poring over company reports and churning out stock recommendations for brokerage clients.
In the US, on the other hand, the doors of a major institution won’t even crack open for a budding analyst unless he or she comes armed with at the very least a business or finance-related degree. Indeed, many firms also want top-of-the-class graduates from an Ivy League university, says Jeffrey Oster, register principal of San Fransico-based Investment Management Research Corp. And an MBA to boot from a leading business school. ‘In 99 percent of the cases, you also need to be – or studying to become – a chartered financial advisor, which helps make you globally employable.’
Sectoral breakdown
Oster adds that US analysts still tend to specialize to a greater degree than UK analysts. That’s partly due to the fact that there are more US-based companies that can be slotted into the different industry segments. But it’s also because many industrial markets have become more fragmented. Take healthcare: in the UK, an investment house may take the broad brush approach and bundle it all under the pharmaceutical umbrella, whereas in the US there could be several sub-sectors – pharmaceuticals, biotechnology, healthcare/facilities, healthcare/medical supplies and technology.
The same applies to technology where there could be ten to 20 sub-sectors including hardware and software, information technology, the internet, server and enterprise hardware, wireline services, wireline equipment, semiconductors and chips. And even within this last category, analysts would specialize in the different types of chips.
‘In a large US investment firm, you typically have an army of analysts covering technology,’ says a UK technology analyst working for the European arm of a major US securities house. ‘In the UK you may have three to four analysts covering hardware and software technology but this is because the US sector is much more developed and specialist than in Europe.’
He echoes Osmint’s sentiments and also believes that in technology as in other sectors, communication is a dividing factor. ‘For example, European technology companies hold analysts at arm’s length and will answer few if any questions about the future. The US companies, however, have to disclose more information and report on a quarterly basis, but they are also more happy to discuss the future,’ he says. And that’s even despite the higher threat of class-action lawsuits.
Not surprisingly, UK or continental European companies eager to make a good impression in order to widen their investor base and funding horizons, have no choice but to adapt their more reticent communication style if they want to impress the US analyst community. Be prepared must be their motto as the questions are lobbed fast and furious by a more probing analyst community fueled by an ever demanding investor clientele.
Balancing act
As pointed out by Ron Dewhurst, head of European equities at JP Morgan in London, who has worked for both UK and US houses, ‘In the US there is a much stronger bias toward both the investor and the corporate. One of the biggest challenges facing the US analyst is to balance the interests of both parties. He has to win the investors’ respect by demonstrating his or her in-depth understanding of the company and sector while proving to the company that the coverage will be honest and fair.’
Hilary Reed Evans, corporate communications director of Xenova, a UK-based biotechnology company, concurs. Xenova is listed on both Nasdaq and the London Stock Exchange.
‘In the US, retail and institutional investors are often as well-informed and technically aware of the products as the analysts. And their views and attitudes are taken into account. Over here and on the Continent, management runs the company and investors are not always considered,’ she says. ‘However, if you have that attitude when making a presentation in the US, you’re dead. You have to be prepared and willing to communicate because you are talking to people who can make or break you and shape your reputation which can affect your funding requirements.’
Christine Soden, finance director of Chiroscience and chair of the finance committee of the Biotechnology Industry Association, also points out that many US investors are willing to wait to reap the rewards, which is particularly important in a field like biotechnology where it can take years for a product to come to the market. However, she believes the downside of a listing in the US for a European start-up company in the biotechnology sector is that it may have trouble finding a following on the other side of the pond because there are already so many established companies in the US.
‘I think some of the UK companies that have listed on Nasdaq have been disappointed by the response,’ says Karl Keegan, biotechnology analyst with Dresdner Kleinwort Benson. ‘It’s important to remember that the US industry is about five years ahead in developmental terms and there are many more profitable companies to cover. They may not find it worthwhile to cover a start-up company with a small market capitalisation.’ (There are roughly 50 privately-held and 38 listed UK biotechnology stocks compared to some 2,000 in the US of which around 300 are listed).
Analyst attitudes – on both sides of the Atlantic – are expected to converge as the European market matures, the euro arrives and new technology flows through the pipeline. For the moment, the US retains its attractions – many European companies cannot afford to miss out on the world’s largest market. As Soden of Chiroscience, which owns Darwin Molecule in Seattle, puts it: ‘I do think you need a presence in the US and it’s hard to get on their radar screens without a listing. It’s important for you to be on American soil.’
