Corporate analysts look to be heading for some tough times but that should have no impact on those who carry out their own research into potential investments
If your sole window on the world of finance was The Value Perspective then you would most likely have a pretty jaundiced view of so-called ‘sell-side’ analysts – the employees of investment banks, whose job it is to research listed businesses and then write detailed notes for the banks’ clients explaining why they ought to sell, hold or, more often than not, buy shares in those companies.
For one thing, rather than taking someone else’s word for it, we prefer to rely on our own research into a business and then form our own conclusions. For another – as we discussed most recently in Don’t just follow – we are hugely sceptical of analysts’ ability to forecast the future. To be fair – as we discussed most recently in When it comes to predictions – we are hugely sceptical of everybody’s ability to forecast the future.
Regardless of what we may think, however, sell-side research is big business. According to this Financial Times article, for example, the total annual budget set aside for analyst research has been estimated at some $16bn (£12.9bn) and the larger investment banks between them email out more than 40,000 pieces of research every week
The trouble is, as the same article – entitled, incidentally, ‘Final call for the research analyst’ – also notes, only around 2% to 5% of research emails are read each week while the majority of printed sell-side reports also end up unread and in the bin. Most ominously for the sector, the sell-side analysts’ target market – global asset management businesses – have indicated they intend to slash their research budgets by about a third.
New EU rules to blame
Pointing to the driving force behind this trend, the FT notes: “New EU rules, due to come into effect in 2018, will force asset managers to pay directly for research, rather than do so surreptitiously by pushing business to the banks whose analysts they like. While this will only affect Europe, most participants expect it to have a significant knock-on impact on the global research industry.”
Despite what we may have written in the past, here on The Value Perspective – and will no doubt write in the future – we have no particular grudge against company analysts. We are sorry to see them heading towards what look to be difficult times but any upcoming changes to the sell-side sector will have no impact on us.
As The Value Perspective team has done for a decade, we continue to believe in the merits of conducting our own research, embracing a contrarian view and reaching our own conclusions on the risk/return profile of any individual investment and every company in our portfolios.