Methodology and explanation of tables
Liquidity poll: Revealing the best market makers
Why you dont have to be global to succeed in Europe:
YOU WOULD THINK that the jobs of analysts sitting in banks credit research departments across Europe would have been a lot easier in 2003. There were occasional blow-ups, such as the Parmalat scandal, but overall last years market rally was astounding and investing in credit throughout the course of the year increasingly seemed like a one-way bet.
But analysts at the bank that has topped the most categories in Euromoneys 2004 credit research poll say this isnt the case. In this environment, picking the credits that will outperform is tricky, and as Rick Deutsch, head of European high-grade credit research at BNP Paribas, points out, investors cant just chase yield either, as one poor credit decision could destroy a lot of running yield. In a tight spread environment, avoiding potential bombs is critical, he says.
Impressive results of concerted effort
BNPPs success in this years poll is pretty impressive. It comes top in six categories, including best overall investment-grade research, second in one category and third in two. Investors also voted it best for ideas and daily research, and e-distribution. From second place in overall investment grade last year, it has taken the top spot from Morgan Stanley, which won this category for the previous three years. Deutsch says this is part of a concerted effort at BNP Paribas over the past 18 months to improve relationships with Europes biggest credit investors, 98% of which voted in the poll (see methodology). Before, most buy-side firms focused on research from the US houses as they were the dominant players in the market. We could not take for granted the recognition that a Morgan Stanley has. We've had to develop our relationships and build our credibility since the merger, he says.
Those at BNP Paribas think it is a sign that investment managers now acknowledge strength in European credit on its own merit and that you dont have to be a global bulge-bracket bank to be a credible European research house. Interestingly, though, perceptions about this differed depending on where the investors were based. UK- and US-based firms still gave most votes to Morgan Stanley by a significant margin, while investors in continental Europe and in the rest of the world favoured BNP Paribas. Clearly, just relying on relationships with the key UK accounts is no longer enough. This is borne out by David Newman, co-head of European credit research at Citigroup, who also says that the bank has made a special effort to increase its profile with continental European investors in the past 12 months.
BNP Paribas winning streak isnt the only notable change in this years results.
Deutsche Bank came top in the largest number of categories last year and took four of the five high-yield awards, but has come top only for high-yield general industries and manufacturing this year, following the departure of a number of senior analysts from the bank in 2003. However much banks argue that its the quality of the team that counts with investors, the departure of key analysts seems to have made a difference to this years results, and not just to Deutsche Banks fortunes. Felix Kaiser and team consistently topped the investment-grade telecoms and media category for Goldman Sachs until Kaiser moved to another position at the bank last year. Matt King and his team came first for investment-grade credit strategy for JPMorgan last year, yet following Kings move from JPMorgan to Citigroup last September as head of European quantitative credit strategy he and his new team at Citigroup come top in this sector this year.
This year it is Citigroup, not Deutsche, that wins most of the high-yield categories, including best overall high-yield research. The whole team has become much more sceptical across the board, which is very healthy and has been reflected in our recommendations, says Newman. Sell-side analysts are often accused of being a mouthpiece for their primary business, but this could not be levelled at us. If anything, we are completely the other way.
Some would argue that banks have gone too far the other way in an effort to broadcast their independent credentials. One origination head moans to Euromoney that his banks fixed-income team put a sell recommendation out on a credit the day the bank was to begin marketing a new issue for the company.
Its certainly true that, once again this year, the independence of sell-side research is a key issue with investors. We have always put a lot of effort into the independence of our individual analysts, within the framework of a bank view that is overall consistent, says Guido Barthels, global head of debt research for Dresdner Kleinwort Wasserstein, which comes out top for most in-depth and objective distribution and most improved credit research in this years poll.
From a regulatory point of view, though, running a sell-side credit research team is a bit like walking a tightrope these days you have to prove its independence from your primary and secondary business. Yet if you are going to have an in-house team, particularly if you are going to carry the expense of a 14-strong team of analysts as BNP Paribas does, sell-side research also has to justify its existence. BNPP believes that the origination and research ends of the business can still benefit each other.
Our success in research is a reward, in part, for being one of the leaders in the European high-grade business, particularly for corporates, says David Ovenden, global head of credit at BNP Paribas. Likewise, these days, research has to be distinct from pitching new issues but its still a critical part of being trusted in deal execution by the client. Now that we know our research is ranked the highest, we can go back to clients and say investors say we know what were talking about, yet nobody can say Paul Hearn [global head of primary markets] has Rick by the scruff of the neck.
Belief in research
At the other end of the scale, some banks credit research outfits seem almost apologetic. The teams at some banks are now so small as a result of the loss of key analysts and/or cost-cutting exercises that some observers wonder why they bother having them at all. As Mark Goldman, head of European fixed-income sales at BNP Paribas, puts it: Firms are either of the belief that research adds value or think that it is just a necessary evil. Even if it doesnt do so from day one, we believe that research adds value, and therefore its much more central to our effort here than it is at other businesses.
Goldman says that BNP Paribas tries to manage actively the relationship between sales, trading and research. The benefit of in-house credit research for the sales and trading sides of the business has long been clear, but investors who responded to Euromoneys poll said they also wanted practical trading ideas from their research banks banks that also have the trading expertise that allows investors to implement these ideas.
Its clear that in investors minds, quality research and good liquidity provision are intrinsically linked, which is partly why Euromoney has launched its inaugural survey of the best liquidity providers in the European credit market this year alongside the credit research poll, the first of its kind in the market.
There have been some other changes to the poll this year. Headhunters in the credit market say that while banks might not be expanding their credit research teams at the moment, they are hiring more strategy analysts or redeploying other sector analysts into this area to meet investor demands. So a category has been introduced covering quantitative credit research and modelling and the category of best indices provider has been amended to include portfolio analytics. According to some credit investors, macro views are much more useful to them than bottom-up analysis anyway. Whereas equity investing is entirely an asset selection process, macro analysis is where most of the alpha is generated in the credit market, says one investor at one of the largest European buy-side firms.
The other area where banks are building their research is in structured products, such as collateralized debt obligations and credit default swaps, one of the key areas of growth in the market. For example, in the past 12 months, JPMorgan has carved out a team from its general credit strategy group to focus solely on credit derivatives strategy.
The golden era of credit returns that investors enjoyed in 2003 is likely to be over, yet last years significant spread tightening across the board means that the safety net for investors has been significantly reduced. It means that this year many credit analysts are recommending that investors diversify as much as possible to find yield; into high-yield paper, into CDOs, into credit derivatives, CDS indices and beyond. It may be true that the need for comprehensive research on these products might now be more crucial than ever but whether they will facilitate the excess returns some analysts think they will is another matter. We look at our poll winners and their key calls for 2003 in the following pages; but those trying to suggest ways to outperform the market in 2004 will face much more of a challenge.