Analysts rummaging through company filings, working on large datasets and financial models, reading about the latest company news or attending investor meets. Isn’t this the picture we get in our psyche the moment we think about an Equity Research Analyst? But this was yesterday. Today the disruptions caused by social media, technology and digital marketing have completely altered the modus operandi of an equity researcher. Not just this, there are a couple of other factors too which have brought about a changed momentum in research and analysis.
According to a report by Slator, global equity research budgets would have come down from $8.2 billion in 2007 to $3.4billion in 2017. Lower trading volumes after the global financial crisis, competition from automated trading platforms, the rise of passive investing through mutual funds or Exchange Traded Funds are some of the reasons contributing to this. Some of the retail investors also complain that the research undertaken by large investment banks only cater to institutional investors. So many of these factors have led the process of Equity Research to evolve. It is evolving to suit the changing trend and preferences of investors.
Here’s how Equity Research is undergoing a steady metamorphosis:
(1) The democratization of equity research:
Research is not just the prerogative of brokerage houses of investment banks. To trim the cost of research, clients are now resorting to independent research platforms. Seeking Alpha, Smartkarma, Investment Revolution, Stock views etc, are few popular websites which are a hub of aggregated independent research. The business models of each of these platforms vary from free, subscription-based to freemium. These crowd-sourced equity analysis platforms offer fresh and engaging content as well as alternative takes on investment. It becomes easier for asset managers as well as retail investors to have direct access to quality and relevant research from a pool investment experts.
(2) Innovative tools at work
Yes, automation has made inroads into equity research too. Collecting data from filings and building valuation models is a thing in the past. Enter TagniFi’s algorithms which automatically checks financial statements and compares them across periods. Then comes Thinknum, a web-based tool that helps analysts to value a company. This also allows analysts to share the models back and forth with asset managers and clients. Because of convenience and cost-oriented reasons, these tools are very popular in boutique research firms and independent analysts.
(3) Spreading the word through social media
Today we have companies which mine twitter comments on stocks. StockTwits is one such company that collects research-relevant information on stocks through Tweets on a real-time basis and delivers to the analysts. There are also Social Market analytics startups which measure the sentiment around a particular stock through social conversations on Twitter, Facebook or LinkedIn. Many listed mid-caps and small-caps are also game about sharing their earnings release and other market-moving information directly on the social media.
(4) Database plus tools combo
There are many research companies which sell research relevant database to analyst either on fixed cost or subscription basis. Delivering raw market data is just a part of equity research, but it is the most crucial part. Earlier data was the monopoly of Bloomberg and Reuters terminal. But these terminals were only meant for companies with deep pockets. Most of these companies also sell the template for financial models which have in-built plug-ins to extract numbers from their online database. Quandi, Factiva, Capital IQ and Zacks are few of the well-known players in this field. On-demand data consumption, customized valuation models and lots of other free resources have made it easier to produce quality research at an affordable cost.
(5) Robo Advisors
We know about the emergence of Robo Advisors in wealth management, but equity researchers also can feel their strong presence. Thanks to the automation wave, Robo Advisors are replacing equity research analysts in many instances. Lower fees, quicker turnaround time, increased accuracy, better accessibility are making research houses to seriously consider investing in robo-advisors. Leading banks like Credit Suisse are using automated software to generate a huge number of reports and company summaries.
Equity Researchers need to embrace disruptions with a cautious approach
As more and more millennials become consumers of research data, we will see an increased dominance of social media and digital marketing in Equity research. Quality of information exchanged over social media will be given importance and it will become more and more integrated with the financial markets. The impact of Big Data in equity research has just begun but it will scale up in times to come. These disruptions are new and catching everyone’s fancy because of the fresh approach and offerings. However, technology, if not used responsibly, can create a disaster. New age Equity Researchers need to exercise caution while adopting an alternative approach, retaining the essence and integrity during the process.
Proschool Online’s analysis of equity research evolution is enlightening. Valuable insights for understanding shifts in financial analysis over time!