Whether you’re a professional investor or a family office; as a professional investor without a full research function of your own you are heavily reliant on external sources of information in making investment decisions. Much of the research that is available in the market, particularly at entry-level price points is produced by the research arm of investment banks. These institutions have an inherent conflict of interest in their coverage, as the companies they are writing research on may be current or prospective clients of the firm in another department. Further, whether related to this or not, investment banking research models have a recommendation distribution skewed almost entirely towards ‘Buy’ – with a small percentage only ranked “Underperform” or “Sell” – recommendations generally predicated on the view that these stocks will underperform an index or realise absolute downside to the tune of a few percentage points. Yet, over the long-term, a majority of stocks actually fall into these categories, meaning a significant minority (if not even a small majority) of these firms’ Buy recommendations will lose money in our opinion.
So independent research can add material value to your investing from a long perspective – but how about short recommendations? As a professional investor, you may not even take short positions. However, you are highly likely to be holding a more concentrated portfolio than many larger funds, which inherently increases your stock specific risk. Take, for example, a popular Western European growth stock, where the majority of sellside analysts covering it rate the shares a Buy. Some of these firms have covered it since pre-IPO; some will be a corporate advisor or broker to the company; some will be interested in participating in equity placings or debt refinancings. However, all have a disincentive to engage in deep diligence: forensic accounting; governance analysis; thorough fieldwork. As a result, these areas go unconsidered and their tyres unkicked. Investors consuming this content as their primary source of insight are therefore in a state of blissful ignorance; unable to value the company fairly, unable to hold management to account, and unable to make a fully informed investment decisions.
Our individual clients frequently note how our differentiated process and conclusions result in them changing, or at least challenging, their opinion on stocks they hold – and many have avoided considerable value destruction as a result. After all, with a small number of stocks in a concentrated portfolio and a double-digit percentage of the market actually halving in any given year; being unaware of the risks in the names you hold can destroy your year’s performance.
Reach out to our sales team to learn more.
