Equities analysts need to become "thought leaders" and experts in their field to stay relevant in an industry moving towards electronic trading, index-based funds and more regulation, the new director of research at Citigroup, Craig Woolford, says.
While investment banks and brokers are culling their equities research teams to cut costs, Mr Woolford has flagged plans to significantly build the capabilities and resources in Citigroup's Australian and New Zealand equities research teams, after taking the helm from Bruce Rolph this week.
"If we look to the last 10 years there's been a reduction in costs and some very experienced analysts have left the market . ... but most of the changes in the industry have been analysts leaving for either corporate roles or buy-side roles," he said.
"The good news for Citi is we cut earlier than our competitors on the view the backdrop was not looking great [and] we're now investing globally in IT and analysts locally and around the world," he said.
"I want our analysts to lead the debate. That can mean different things to different analysts – it can be their industry expertise, it can be the accuracy of their financial forecasts or the success of their stock calls.
"I want the analysts to hone in on those things that really matter most to them and, more importantly, the skills that are valued by the clients."
Independence of research
Mr Woolford is also keen to emphasise the independence of Citigroup's equities research, at a time when several firms have been accused of conflict of interest, lack of objectivity and of being beholden to corporate relationships.
"The Chinese walls are incredibly thick at Citi," said Mr Woolford, who reports to Citigroup Australia chief executive Stephen Roberts and head of Asian research Brent Robinson, rather than Citigroup's investment banking or markets teams.
"Since 2006 the walls have been strengthened and there are numerous examples where the analysts are clearly independent in their views, regardless of any corporate relationships," he said.
As a case in point, Mr Woolford has had a sell recommendation on Woolworths for more than 12 months, even though Citigroup's investment banking arm is reported to be advising Woolworths on its loss-making Masters business.
Mr Woolford believes there is a role in the market for independent equities research firms that earn their income from subscriptions rather than commissions.
However, he says successful analysts need to be able to pull together a myriad of different sources of information to build a clear picture of a company's prospects, and this requirement favours organisations with extensive resources.
"That process has some scale benefits, whether it be the information systems we have access to or the global nature of your research," he said. "Success on that score lends itself to being one of the larger broking firms that does have that global reach.
Looking for expertise
"The success of some of these independent firms only reinforces the view that I have that clients are looking for expertise."
In Europe, new rules are being introduced that will require fund managers to unbundle research payments from dealing commissions to avoid conflicts of interest.
The European Securities and Markets Authority says fund managers should either pay for research out of their own revenue or set up research payment accounts for clients with an agreed budget.
Investment banks and fund managers have been warned that similar regulations will inevitably be introduced in Australia.
"I haven't formed a strong view as to whether it will or won't," Mr Woolford said. "I'm certainly very aware of it and it does influence my thinking on how we set the direction for the business.
"Without a doubt if there is unbundling then research has to have a very high threshold to prove it is adding value. But if we have a team of experts who are well recognised in their field and offer something differentiated then there is no doubt in my mind we can still be rewarded for the research that we do."
Mr Woolford, who joined Citi from Commsec in 2005, is keen to continue to lead Citi's consumer sector team despite his new responsibilities.
"I'm still the lead on the consumer sector. I'm very passionate about being an analyst," he said.
"The thing I love most about being an analyst is you're never bored. There's always a new challenge, there are always questions that need to be answered, and you get to meet and talk to a lot of interesting people in trying to answer those questions."
He is optimistic about the outlook for the discretionary retail sector in 2016, especially Myer and JB Hi-Fi.
"Australian retail on balance has had a really good Christmas. It could be one of the best Christmas periods in over 10 years for discretionary retail," he said.
"Many of the factors that have dragged retail down have all turned the other way – price deflation is disappearing, offshore travel is reversing and now we see inbound tourism accelerating and there's a more stable political backdrop.
"The biggest challenge for retail in 2016 will be the ability to pass through price rises triggered by the lower Australian dollar. The good news for most retailers is that in categories like small appliances and hardware [where prices have already risen], we've generally seen acceptance by shoppers."