Published August 25, 2008

Time to track accuracy of analyst calls

By R SIVANITHY
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IN RESPONSE to a call made last week in this column (BT, Aug 19, 'Include analyst information in research reports'), a reader wrote in to say he would be compiling data pertaining to analyst performance over the next 12 months to see just how many recommendations actually achieve their target prices, and that once the study is complete, it would be offered for publication in BT.

'Small investors not only trade more than large investors following upgrade and buy recommendations, but also trade more following upgrade and buy recommendations than they do following downgrade and hold/sell recommendations.'
- The Accounting Review

Our immediate response is that although the information is of unquestioned value, why should a member of the public have to undertake such an onerous task?

Why hasn't an official overseeing body taken the initiative to track the accuracy of broking recommendations and to publish the findings for public consumption?

Surely, such information would be useful for decision-making, especially for retail investors?

After all, institutional players have at their disposal several tracking agencies that provide data on, say, who the region's best airline analyst is, or which house made the best calls on any given sector. Yet, no equivalent service exists for small investors, who are in greater need of such input compared to their larger counterparts; studies have shown, for instance, that the retail segment is more likely to lose money through bad calls than institutions.

In 'When security analysts talk, who listens?' by Mikhail, Walther & Willis, published in The Accounting Review last October, the writers found that 'small investors not only trade more than large investors following upgrade and buy recommendations, but also trade more following upgrade and buy recommendations than they do following downgrade and hold/sell recommendations'.

'Consequently, large traders generate statistically positive returns from their trading, while small traders generate statistically negative returns from their trading. These findings are consistent with large investors being more sophisticated processors of information, and provide some support for regulators' concerns that analysts may more easily mislead small investors.'

Interestingly, the same team of academics in 'Does forecast accuracy matter to security analysts?' (The Accounting Review, April 1999) found that getting it right as far as earnings forecasting is concerned is important to individuals and that those whose forecast accuracy was lower than their peers were more likely to change jobs. You'd have to wonder what an equivalent study here might find.

Whatever the case, since information on analyst track records is obviously important to retail investors, the next logical question is: who should provide it?

The obvious response then would be to look to the Singapore Exchange (SGX), especially since it not only regulates the market but also the broking industry.

More relevantly, SGX helps defray the cost of research via its Research Incentive Scheme, a programme aimed at helping small companies enjoy greater investor reach and one which has grown increasingly popular with the public since its inception in 2003, with downloads now averaging 50,000 per month.

However, experience has shown that retail investors are probably reluctant to pay for such a service and it is an expensive business to collate 'buy' recommendations across houses, sectors and time.

Adding to the expense is the analysis side of the equation - the software required can be complex and costly - and it could be that when you add it all up, SGX (being a commercially driven entity with an eye on its bottom line) might be reluctant to undertake such a project.

Other than SGX, the other obvious candidate is the Securities Investors Association of Singapore (SIAS), whose mandate is to enhance the lot of retail investors.

The provision of analyst performance data would clearly be consistent with this mandate but, again, cost could be an issue.

Which brings us back to the original question: who is to fill this gap which, if properly filled, would be of great service to the retail public?