J.P. Morgan Co. is seeking to differentiate itself in the cut-throat securities business by offering what it calls value-added research.
The blue chip money-center bank did not receive full regulatory approval to underwrite corporate securities until 1990. But it had begun to build its research capability long before that, laying the groundwork back in 1988 for a global research force that now numbers 500 people.
Morgan's customers--both institutional investors and corporate issuers--are in general agreement that the company's foresight is paying off.
|Fundamental Work'
"Morgan's research is indepth, fundamental work and there is a shortage of that on Wall Street," said Edward Mathias, a managing director at T. Rowe Price Associates, Baltimore, one of the country's largest money management firms. "Money managers are watching [Morgan's] strategy and saying that they will be a major factor in the business."
Morgan's research strategy is broad based--covering equities, emerging markets, fixed-income, and derivatives on a global basis. And its management is pushing hard to assure that research is an equal partner to the sales and trading functions of its securities desks.
Seen as Calling Card
In fact, Morgan, more than most Wall Street houses, is banking on the idea that solid research is its calling card to the investment and issuer community. By combining its vaunted banking name with a trusted analytical product, Morgan believes it will advance its reputation from traditional corporate finance to the world of stocks and bonds.
To be sure, the Wall Street firms that Morgan competes against boast well-established, prominent, and sophisticated research analysts and products. And they, too, use their analytical expertise as a selling point when trying to win new customers. But Morgan claims that its product is demonstrably different in the level of analysis it provides.
According to Till M. Guildimann, the managing director who oversees Morgan's research resources worldwide, the firm pours $100 million a year into research efforts.
|An Integral Part'
"We probably spend more proportionally than most of our competitors do," he said. "But that is because we see research as an integral part of any business we enter."
Morgan, of course, has long been a bastion of top-notch analytic talent. The fruits of the labors of its economists, statisticians, and analysts have traditionally been enjoyed by commercial bankers weighing credit and financing factors of customers, and by the banks' money managers.
But the new push into fixed-income, equity, and other underwriting businesses has-sparked a full-fledged effort to convert analytical expertise into a competitive weapon.
|Public Side of the Wall'
More than 75% of Morgan's research resources today are devoted to what Mr. Guildimann refers to as the "public side of the wall"--providing information to Morgan clients worldwide.
Economic analysis remains the foundation of all research at Morgan, he said. The reams of data that form the base for Morgan-produced bond indexes and global analyses are shared liberally with analysts in the new underwriting units, he said.
The securities research organization is highly decentralized, but it boasts a sophisticated communications network that enables all of its members to swap information.
Teamwork Pays Off
That kind of cooperation enables Morgan researchers to put out products that differentiate them from other firms, Morgan officials claim.
"At other places, there are so many little fiefdoms with their own agendas that it is hard to get things done," said Eunice Reich-Berman, a managing director in charge of taxable credit research. "Here, if somebody has a good idea, everyone works to make it happen."
As an example, Ms. Reich-Berman cited a product that her department is now marketing. Dubbed "Sovereign CreditRadars," it calculates six features that determine the credit quality of a sovereign-bond issuer, allowing investors to compare a country to other rated issuers.
Relies on Staff Economists
According to Ms. Reich-Berman, Morgan's fixed-income staff relies upon the company's economists--who are typically based in countries they cover--to produce the data. Next year, Morgan expects to publish versions of CreditRadars that apply to utility companies and financial institutions.
The product is also an example of the way Morgan has made a virtue out of weakness. Morgan executives said the company's late arrival to the securities business, which was caused by regulatory restrictions, has allowed it to take a long look at what is missing from the research marketplace and work to fulfill the gaps.
"We had the opportunity to see what would make sense and to figure out how can we build a research organization that is different and offer different products that are successful and hard to copy," Mr. Guildimann said.
The Long View
In the equities business, for example, Morgan officials sensed a need among money managers for in-depth research that includes long-term perspectives on particular companies and industries.
Morgan eschews producing the standard two-to-three page equity-research reports that pick up on daily news events and moment-to-moment changes in earnings forecasts.
Instead, it chose analysts who were interested in producing longer, more-nuanced reports that discuss a company's capital structure, cash-flow, and the dynamics of the industry in which it operates.
|More Thorough Approach'
"We saw an opportunity to fill a void that exists in the market," said Clayton Rose, a managing director who runs equity and high-yield sales and research. "We have long tradition of being client-focused rather than transaction-focused, and in research, that leads to a more thorough approach to financial analysis and industry analysis."
Most of the 75 professionals who work in Morgan's equity research unit were transferred from the company's "financial analysis division"--a unit that conducted research for the company's lenders and for its-mergers-and-acquisitions specialists.
That background gives these analysts a firm grounding in the standards that the company expects of its new business area. It also helped them develop the skills needed to examine the essential details of capital structure, credit quality, and cashflow that the opportunities for investors.
|That's the Challenge'
In the equities unit, however, the researchers must correlate their findings to the price of a company's stock.
"That's the challenge for us," Mr. Rose said. "That is the piece of the puzzle these analysts didn't deal with in their old environment."
So far, money managers say Morgan is meeting the challenge.
"Their research definitely shows they have experience in different industries and companies," said Jeffrey Shames, chief investment officer of Massachusetts Financial Services in Boston. "They look like a major player for the future."
