– By Samuel Harrison – Current MIF student
The third IE Titans of Finance conference was hosted by Dennis Jullens, European Head, Valuation & Accounting Research at UBS. The session began with Mr. Jullens dispelling some of the current hype and myth surrounding UBS’s Investment Bank, assuring us that it is very much alive and active. Beyond this, his focus was very much on the equity research business function…
Engaging the class, we were asked to estimate the percentage of Investment Bank research rankings that were, ‘buy’, ‘hold’ and ‘sell’. Rationally of course, you would expect them to be roughly equal, varying by the state of the economy and current future expectations. After some discussion, and to the shock of many, it was concluded that the ratings skew is very much towards ‘buy’ ratings, (up to 75%), albeit for perhaps the wrong reasons. The characteristic bullishness of sell-side analysts was boiled down to several key business motivations, with the emphasis being placed on the maintenance of business relationships with corporate clients. To keep clients happy, analysts have been ‘encouraged’ to provide their stock with ‘buy’ ratings. This partiality raises the age-old questioning of the validity of sell-side research. Mr. Jullen’s brutally honest approach was broadly well received, carried particular weight, as we were hearing it coming from the horses mouth, so to speak. Therefore some crucial words of advice were offered – “Follow our sell recommendations”. We were told the rare sell-ratings are more exact, precise and statistically outperform the more numerous and also politically tied buy ratings.
The business model for research departments was cross-examined and thoroughly discussed. Indeed, following increasing regulation, known broadly as ‘unbundling’, we see how life is now rather difficult for equity research providers, who offer a lot of service to clientele (hedge funds, pension funds and asset managers) and are guaranteed no commission at all. A questionable model, although one that has been working reasonable well so far. We also took a close look at how the department works usually, using Apple (AAPL) as case study, valuing the business and forecasting future cash flows and developing different scenarios and price targets (known as ‘bear’, ‘base’ and ‘bull’-case estimations).
The class offered a highly educational probing of UBS’s equity research operation. Indeed, offered some key take-aways for not only those utilizing equity research for trade ideas, but also those who are considering a career in this business function. It was wrapped up with some personal tips from Mr. Jullens on interview technique for those applying for roles at UBS.
About the author