Published on July 5, 2013 by Guest Blogger
As Robert Frost said many years ago, “I took the road less traveled by, and that has made all the difference.”
Recently, we concluded one of our marquee Equity Research engagements after a two-and-a-half-year journey. Our client, a large broker-dealer, was acquired by a leading pension advisor that wasn’t keen on holding on to the research platform. This has been one of our most challenging engagements—we staffed the team with some of our most seasoned analysts, a few of whom had front-end experience in financial markets around the world, including New York, London, and Mumbai.
In those two-plus years, our team of six highly skilled analysts wrote 46 stock initiation reports that were published by the client. Our team had the task of identifying investment opportunities that would generate positive alpha from an initial list of 1,000 value stocks provided by the client’s ‘black-box’ model. Following the selection process, our analysts did fundamental research on stocks to create a credible investment thesis and arrive at recommendations. Our analysts wrote end-to-end initiation reports within 5-6 weeks—reports that were 95% ready for publication on the client’s research platform. Our stock picks were highly successful, and our Buy-rated stock recommendations outperformed the Russell 2500 Index by over 1,000bps on a market cap-weighted basis over a 20-month period.
As you can imagine, this was a very-high-stress engagement, with our analysts working an average of 65 hours a week to get these reports published in five weeks flat! Besides, this wasn’t an engagement that involved other maintenance tasks around modeling, data gathering, or writing sector notes. It involved writing initiation reports week in and week out, requiring tremendous rigor in analyzing companies across sectors, developing financial models, writing end-to-end reports, and finally subjecting these to the scrutiny of expert analysts in-house and at the client’s end.
This kind of high pressure is not something even front-end analysts are used to, as they usually do not have to go through the grind of initiating on a new stock each month! Some of our analysts did crumble under the pressure and left the team abruptly; some wanted to be rotated out into less stressful engagements, while others swore to never get into such engagements again, no matter how big the bonuses were. We finally ended up with a team of six enduring warriors who roughed it out and delivered insightful analytical reports that they are proud of having written. Their research skills can rival some of the best analyst talent in equity research globally.
Given all the delivery challenges and the resultant investments that we had to make to develop and maintain this team, we could never make any money on this engagement. In each of our internal quarterly reviews, we would see this engagement as a loss leader and how we should tread with caution in structuring such engagements in the future.
However, as I reflect on this journey, I am glad that we took on the challenge and delivered what the client wanted because it taught us some fantastic lessons in high-end equity research offshoring.
We created some of the best analysts—the kind that can take any company and create an end-to-end investment story around it and effectively defend the investment thesis, recommendation, and analysis in front of traders, sales teams, and investors, in a heartbeat.
We also created a structured and comprehensive training program within us to groom analysts with high potential at relatively low costs so that we were ready for such demanding assignments in the future.
We successfully created a new pool of 14 such analysts after a six-month-long rigorous training-cum-apprenticeship program.We groomed some of our best managers who can work with demanding clients and equally demanding team members, and drive sustained morale, analytical rigor, and profitability in such challenging engagements.
We have also improved the breadth and depth of our knowledge base of coverage initiations, along with our ability to reach out to industry experts and consultants to put some teeth into our primary and fundamental research.
We often tend to look at everything we do with the same lens; therefore, we look for the same set of outcomes—high margins and high-revenue growth—from every client. If we alter our focus somewhat, there could be a world of new opportunities and outcomes that can help us embrace new paradigms of offshoring.
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