After experiencing the most tumultuous stock markets of their careers in the past year, investment advisors, on average, are less satisfied with the quality of their firm’s equities research than when rosier market conditions prevailed.
Overall, advisors rated the quality of their firms’ equities research lower by 0.4 of a point this year than last year. But averages don’t tell the whole story. In fact, half of the 16 firms in this year’s survey saw their equities research ratings drop by more than half a point while only three gained any ground whatsoever.
The firms that earned the greatest accolades from their advisors were BMO Nesbitt Burns Inc., GMP Private Client LP and Richardson Partners Financial Ltd., all of Toronto. Nesbitt Burns has been a consistent leader in this category, and advisor comments reflect a high level of satisfaction with the firm’s stock analysis and pride in its track record for recommendations.
Advisors at Richardson Partners like that the firm’s equities research comes from third-party sources and is then processed and interpreted in-house. Advisors have access to research from several providers, including Zurich-based Credit Suisse Group, Montreal-based National Bank Financial Ltd., Toronto-based Genuity Cap-ital Markets and Calgary-based Tristone Capital Inc., the last of which focuses strictly on energy research.
“It’s as good as it gets,” says a Richardson Partners advisor in British Columbia. “We use everyone’s research and we have a team that finds the commonalities and lends its own voice to it.”
On the flip side, Toronto-based ScotiaMcLeod Inc. saw the biggest drop in its equities research rating, as advisors scored the firm 1.2 points lower than in 2008.
“There is a conflict of interest if we’re doing the underwriting or investment banking,” says a ScotiaMcLeod advisor in Ontario.
Other ScotiaMcLeod advisors complain about lack of stability and high turnover in the research team — and a lack of followup on stock recommendations.
“They’re good at picking stocks, especially in a bull market. But there is very little support in place — especially for the ‘sell’ discipline — in a bear market,” says a ScotiaMcLeod advisor on the Prairies. “You almost have to divorce yourself from what they’re telling you.”
Greg Pardy, managing director and head of equities research for Scotia Capital Inc. in Toronto, says that although he is “disappointed” in the lower research rating ScotiaMcLeod advisors handed out relative to last year, he is not “entirely surprised.
“After a number of years of normal conditions, we experienced an unusually high level of turnover with a number of seasoned analysts — most of whom made either a lifestyle choice or pursued buy-side opportunities — which contributed to coverage gaps,” he says. “I would include myself in that mix, given that I transferred coverage of the integrated oil and senior exploration and production sector once I became head of equity research. That said, I am pleased that the replacement analysts who have since joined Scotia Capital are working out well, with much of our coverage restored.”
Scotia Capital’s mix of “outperform” and “underperform” ratings for stocks, Pardy adds, are better balanced than many of its peers. The firm attempts to preserve a ratio of 3:2 for outperforms vs underperforms, to ensure objectivity and quality in its recommendations.
Advisors with Vancouver-based Canaccord Capital Inc. were also less satisfied with their firm’s equities research this year, rating it a full point lower than last year.
“It is very biased,” says a Canaccord advisor in B.C. “It is pumping up companies for which it is getting financing.”
Adds a Canaccord advisor in Ontario: “It didn’t make good calls. The information was misleading.”
The comments regarding conflicts of interest and a reluctance to point out negative attributes of investments don’t surprise Edward Waitzer, a senior partner with Stikeman Elliott LLP in Toronto and former chairman of the Ontario Securities Commission.
“Sell-side research has been consistently demonstrated to miss most of the major insights in company analysis and err toward ‘buy’ recommendations,” Waitzer says. “In a bull market, rising tides cure everything, as the majority of stocks are rising. But in a bear market, or even a market that is stable, the flaws are going to show up.”
In addition, a focus on underwriting and securities distribution at some investment dealers has led to a dearth of critical analysis on the long-term sustainability of individual companies, he says, as well as a fear of offending corporate issuers through negative stock commentary.
@page_break@”The same firms that are putting out research are also providing investment banking and distribution services to issuers,” Waitzer says. “The system is upside down, with the service providers at the top of the food chain and the clients at the bottom.”
Historically, the mix of “buy,” “sell” and “hold” recommendations has been weighted 49% toward buys, 39% toward holds and 12% toward sells, which does not encourage long-term investing, Waitzer says. Ideally, he adds, the ratio should reflect more holds and an equal number of buys and sells. IE