Wall Street research has always been a bit of an enigma to many financial industry participants. On the one hand, anything produced by a sell-side firm is ultimately conflicted by the very business of the firm publishing it. On the other hand, despite numerous attempts to draw a slew of regulatory bright lines around the research function (the latest being MiFID II), independent providers still struggle to get the buy side to pony up enough cash to stay in business. It’s a bit like the long-suffering news industry – everyone wants it, but few are willing to pay for it.
Part of the problem lies with the commoditized nature of the product in general. Although undoubtedly populated by legions of very smart analysts, research reports generated by the sell side are broadly based on the same information and have little substantive differences between them, aside from subjective opinions and customized projections – what growth rate is modeled for years 3 to 5, what valuation is estimated, the house view on interest rates, etc.
Increasingly, however, upstarts in the research business are finding some traction. One of them, London-based Woozle, was co-founded by former Citadel and Goldman Sachs quant veteran Mark Pacitti, and takes a fairly old-fashioned approach to the topic of equity research. Woozle takes its name from the “Woozle effect” in academia, whereby a research conclusion is cited as evidence by other researchers over and over again until it is perceived to be valid, regardless of whether the original source was actually correct in the first place. In founding Woozle, Pacitti is taking aim at a similar tendency within equity research to anchor opinions and predictions on unreliable or incorrect third-party information taken as gospel by analysts and investors alike.
Taking a page from the old retail mall traffic counters of 1980s fame, Woozle is anchored on the idea that big-data excel models and theoretical return algorithms are missing the benefits of old-fashioned field work, and thus can’t pick up on incipient trends in performance and glean insights into how companies are actually functioning. The result? A huge opportunity to earn true alpha is being missed.
Woozle’s Pacitti calls it “systematic scuttlebutt,” or the real-time human intelligence that can be gathered from managers, employees, customers, competitors, suppliers, observations, site visits, etc. Meshed together, this intel can yield tremendous information about the current and future health of a company. Woozle’s primary research is gathered through systematically interviewing a cross-section of on-the-ground key company stakeholders, and then analyzing that data to form insights into crucial fundamental metrics, like sales trends and profitability, ahead of key reporting deadlines. Importantly, the whole process is transparent – Woozle’s researchers identify themselves when dealing with companies and the rigorous compliance and confidentiality procedures are followed – and ultimately creates a broad mosaic of non-material, public information that, when synthesized together into a coherent picture, can deliver an informational advantage to Woozle’s investors.
At the moment, the company’s subscription service concentrates primarily on more than 70 global consumer retail firms, but the team can also do research into sectors such as healthcare, industrials, technology and telecom. The company’s offering is broken into tiers depending on how many companies are reported, and at £15,000 ($18,980) per quarter for its flagship European consumer retail product, is not for the faint of heart. But with its unique cross of traditional equity research and intelligence gathering, Woozle comes along as regulations such as MiFID II require the strict unbundling of research from trading commissions and the establishment of a cash price for the research itself – both of which are going to shine a glaring spotlight on products that actually help investors make money and those that don’t. Institutional consumers of equity research are about to become a lot pickier.
If Pacitti is right – and Woozle’s real-world primary research can consistently help generate alpha at a time when a slew of new regulations are going to essentially force a culling of low-value research providers in favor of high-value niche participants – the company will be at the vanguard of a new generation of equity research companies going back to the basics to ferret out the must-have insights and observations about the companies under their coverage. If it works, the research business will have come full circle, and investors will be more than willing to pay the price.