As Matt Unsworth, Merrill Lynch’s most recently departed head of Australian equities, tells it, swapping a bulge bracket firm for a research start-up was only a matter of time. But the part that might have surprised the younger Unsworth – had he been shown his life flash-forwarded – is his choice of business partner.
Unsworth and Angus MacGowan first met at university as fierce sporting rivals, the former playing AFL for the University of Melbourne blues and the latter for the uni blacks.
More than 20 years later, they not only ended up living in the same Melbourne street, but they’re building a business together – Quantmetriks, a research firm that sifts through macro data to unearth industry trends, and in particular, catches the inflection point when sectoral growth begins faltering.
Unsworth, who is married and has two children, has worked for a string of investment banks since 1997 when he “fell into” his first role as an analyst in London, after answering an advertisement that caught his eye in a newspaper.
But he says that it is becoming increasingly difficult for bulge-bracket research analysts to produce good “bottom-up” research from an investment bank, due to regulatory and financial pressures.
“Investment managers have become increasingly cynical towards the value of sell-side research. You can see that in the way they have built up their own investment teams. That’s a reflection of the fact they don’t get the value out of the sell side that they used to,” he says, noting that 55 cents of every commission dollar of brokerage is allocated for research product.
“Across investment banks there are such huge internal conflicts of interest, and an increase in regulation and compliance, analysts can’t say what they really think.”
The Australian Securities and Investments Commission’s ongoing investigation into whether gold miner Newcrest breached disclosure rules by briefing analysts on its profit guidance is just the latest and most high-profile version of the heightened regulator risks.
MORE RESOURCES INTO MACRO RESEARCH
Like Unsworth and McGowan, the global investment banks have recognised the restrictions and Unsworth points out their teams are throwing more resources at macro research.
“You’ve seen a huge transition from research products globally. Global investment banks are putting more resources into macro, where it’s easier to make controversial statements when talking about market or stock,” he says.
Unsworth stresses the Quantmetriks system is not about individual stock analysis, and says its strength lies in the ability to put a company’s earnings in a broader, global context.
To illustrate the value, he picks Alumina. From a fundamental perspective, Unsworth says he’s never seen a reason to own the stock.
But viewed from the perspective of global aluminium demand – alumina is a key input in production – coupled with the weakness in the Australian dollar, then it starts to look interesting, he says.
Quantmetriks gathers data from dozens of central statistical agencies globally, which in turn get it from the individual companies that operate in those sectors and provide the agencies with information around volume and pricing.
Using the reported CPI numbers and breaking them into segments, the product matches CPI (price) against GDP (volume) and delivers a month by month sectoral view of price, volume and cost.
Put against historical data, that delivers a clear read on whether the sector is looking attractive. The major weakness in the data is that it is a month old.
The other limitation is that Australia doesn’t provide the data in the same detail that is done offshore, so there’s no domestic data.
Unsworth doesn’t see that as a problem.
“We do provide an unparalleled view on the global earnings of companies. About 25 per cent of the top 200 have at least 20 per cent of earnings coming from offshore,” Unsworth says.
“And if you think about the outlook for Australian market this year, the market is expecting . . . 3 to 3.4 per cent GDP against a slowing mining boom, and manufacturing can’t pick up the slack, I think one of the strongest themes from fund managers is buying offshore earnings.”
Unsworth says the product has proved most valuable as an early indicator of profit warnings.
He cites Caterpillar as an example, noting that their data had shown for a few months that US manufacturing and mining had been deteriorating significantly for a time, something that he says many fundamental analysts had missed.
The Quantmetriks data stretches back a while – the system was developed over 15 years ago by Tosca chief economist Savvas Savouri, who worked with Unsworth in Europe. Unsworth and Savouri have been toying with the idea of setting up an independent research product since they worked together in Europe.