The founders of Cornerstone Macro — Andrew Laperriere, Nancy Lazar, Roberto Perli and François Trahan — could hardly have more impressive pedigrees. Over the past 13 years, they have amassed a total of 33 appearances on Institutional Investor’s All-America Research Team, in such sectors as Economics, Portfolio Strategy, Quantitative Research and Washington Research. But will their reputations be sufficient to ensure the success of the New York–based policy boutique they launched in April?
Craig Moffett and Michael Nathanson may be asking themselves a similar question. These two have racked up 26 appearances since 2004 for their coverage of Cable & Satellite, Entertainment, Media, Publishing & Advertising Agencies and Telecommunications Services. Moffett left Sanford C. Bernstein & Co. in May to launch his own firm. Nathanson, who worked with Moffett at Bernstein before moving to Nomura in 2010, rejoined his former colleague last month; they rechristened the operation MoffettNathanson.
Timing is not on the side of these analysts, as the amount of money that investors allocate to research has declined sharply. “The market isn’t where it was in 2006 and 2007,” reports Michael Mayhew, global director of research at Integrity Research Associates, a New York–based industry tracker of investment research trends. Back then clients assigned significant institutional equity commissions to independents. Today the overall commission pool is 30 to 50 percent below its 2007 high, he says. In addition, regulatory hurdles are higher when third-party research providers are involved, as money managers are required to ensure that these firms meet compliance standards.
Nonetheless, Mayhew sees encouraging signs. Although “there is no evidence to suggest that the market will go back to 2006–’07 levels,” he says, the situation is improving. Last year the environment for independents was “horrible,” he contends. This year? “Better than horrible.”
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The current environment stands in stark contrast to the period from 2003 to 2008, when bulge-bracket operations were funneling millions of dollars to independents as part of the Global Research Settlement, an agreement federal and state securities regulators reached with firms that had been accused of allowing their investment banking units to exert undue influence on their research departments. When the agreement was in effect, merely being independent virtually ensured a steady flow of business. That’s not enough now. The emphasis has shifted from a firm’s characterization to the characters at a firm.
And that bodes well for Cornerstone Macro, Mayhew believes. “The people are extremely credible, with a great track record,” he says. Moreover, “we’re still in an environment where macro trends really impact the market,” so Cornerstone’s approach is relevant.
“Macro is the cornerstone of investing,” affirms Trahan, who is top-ranked in Portfolio Strategy for a second consecutive year — and the seventh time overall — and is a runner-up in Quantitative Research. He debuted on the All-America Research Team in 2004, when he was with Bear, Stearns & Co., and has appeared every year since, ranking in both sectors consistently since 2008.
One year earlier he had moved to ISI Group. That’s where he met other members of his current team. Lazar co-founded ISI with economist Ed Hyman in 1991. Laperriere joined in 1999; Perli, in 2010.
What distinguishes this firm from other macro shops is its holistic approach, Trahan explains. Each of the founders is an acknowledged expert in a specific area that is inextricably linked to the other analysts’ coverage; monetary policy affects the economy, and economic conditions influence portfolio strategy. This structure creates “special synergies,” adds Lazar, who claims second place in Economics and has been voted onto the team every year since 2001. “We all hold similar standards, which creates an easy work environment.”
The founders of New York–based MoffettNathanson share that sentiment. “Building a partnership is about bringing together the right talent,” says Moffett. “Every day I go into work, I do so knowing that we will all succeed or fail based on how well we work together as a team. It’s easy to lose that camaraderie in a larger organization.”
Structural changes in the media and telecommunications industries are fueling a need for a more comprehensive approach to coverage, Moffett notes. Rather than being restricted to the sectoral format many large firms employ, he and Nathanson can “collaborate across the value chain to deliver more insight together than either of us could on our own,” he says. “One plus one is three.”
Team morale and a shared research philosophy are great, but they’re hardly the only reasons that star analysts will leave the relative safety of a large firm and assume the risks of running their own businesses. There’s also the money. “Effectively, a firm uses revenue from [the analyst’s] research to subsidize other sectors,” explains Integrity Research’s Mayhew. Those who oversee their own operations can more directly and materially benefit from the money their research generates, he adds.
Analysts who have taken the plunge point to other motivations, such as greater freedom and control. In addition, boutique-based analysts can more easily tailor their offerings to specific clients, Trahan contends, whereas “research at bulge brackets has been commoditized.”
To be successful as an independent, however, a researcher must be “not just good at analyzing stocks and markets, but also excited about being an entrepreneur,” Mayhew observes. Regular pay is not guaranteed, and principals must solve problems in areas outside their current expertise.
“You have to be humble and honest with yourself,” agrees Trahan, adding that the first step is acknowledging that you can’t do everything. Cornerstone Macro recently added a CFO and an office manager to help “fill the holes in our experience,” he notes.
Moffett also recognizes that many in his squad will be moving beyond their comfort zones. “Everyone needs to be willing to wear lots of different hats,” he says. But since the trade-off is being independent, “we wouldn’t have it any other way.” • •
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