Published August 19, 2008

Include analyst info in research reports

By R SIVANITHY
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BROKING firm analysts often find themselves lodged between a rock and a hard place - call a 'sell' on a stock when the market is hot and rising and they risk ridicule (and loss of clientele), while a 'buy' when the market is depressed and bearish is typically greeted with scorn.

Additional data on experience, track record and length of time spent covering the particular industry or stock would surely be useful.

Of course, in a market governed by the maxim of caveat emptor, it's possible to argue that the onus rests on the reader or investor to evaluate investment recommendations on their own merits and thereafter to make their own minds up whether to adhere to the 'buy' or 'sell' call.

In order to do so, though, there should be full and proper disclosure of all relevant details. There can be no argument with this; neither can there be any debate that full disclosure includes assumptions made about earnings estimates, discount rates, industry conditions, risk premia and so forth.

Equally, if the analyst holds shares in the firm, this should also be disclosed, as should data on risk factors.

But what about the qualifications, experience and track record of the recommending writer? Should this information also be included in research reports?

Experience counts

The answer has to be yes - after all, a 'buy' from an analyst who has had many years covering the same stock would carry a lot more weight than one who has, say, a few months on the job.

These were suggestions made by a reader in an email recently to BT. It was prompted by a large difference in opinion between the reader's view of a stock and a broker's positive view of that company. This extended back several months and encompassed two 'buy' calls - the second even after the stock had dropped sharply and looked doomed to continue sliding.

Obviously well-versed with the industry that the company operates in and its competitive climate, the reader believed the broker was overly optimistic in his outlook and too simplistic in his assumptions. As a result, the reader repeatedly questioned the analysis, suggesting that it was flawed.

Months later, the reader has been proven correct, the stock in question having plunged to new lows amidst earnings and various other concerns.

A few points have to be noted. First, given that a significant part of the market has collapsed - China and property stocks, for example, are already at 52-week lows - then by extension, a large number of analysts have also been repeatedly proven to be wrong this year because the majority of reports at the start of the year were of the 'buy' or 'overweight' variety.

This applies to analysts who cover blue chips as well as second- and third-line counters, and includes large, well-known foreign houses who are reputed to offer superior research, compared to the smaller, local brokers.

Second, the macro conditions have changed drastically in a short space of time, making it difficult to categorically lay blame for inaccurate research calls squarely on the shoulders of analysts.

Third, as long as the 'buy' or 'sell' calls were made objectively, in good faith and properly cleared by in-house internal controls, then analysts should not be discouraged from sticking their necks out with contrarian calls that may be subsequently proven wrong.

Having said this, there is clearly plenty of scope to improve on current disclosures contained in research reports. Currently, the only analyst-specific information which appears on reports (apart from name, email address and contact number) is whether the writer has a position in the stock concerned - and even this is always in fine print at the end of the report.

Corporate finance deals

It isn't difficult to improve on such meagre disclosures. Additional data on experience, track record and length of time spent covering the particular industry or stock would surely be useful.

Other areas would also benefit from improved disclosure. Corporate finance deals, for example, between the company and the broker are not revealed; instead, brokers are allowed to get away with the ludicrous disclaimer that they may have had a relationship with the company which could affect the objectivity of the report and that as a result, investors should not rely entirely on the report for their decision-making.

The point here is that while steps should be taken to safeguard the interests of the investing public, they should also not penalise analysts nor discourage them from discharging their duties properly. The only way to arrive at a workable middle ground is through proper disclosure and, is this regard, there's much scope for improvement.