Equity  

Henderson's Bennett sees end of 'EPS jockey' analysts

Henderson's Bennett sees end of 'EPS jockey' analysts

Henderson's John Bennett is hopeful that Mifid II regulations forcing fund managers to unbundle research costs will prompt an overhaul of how analysts assess companies' merits.

The European equity manager bemoaned a chain of events that he said had led to equity analysts becoming “quarterly earnings per share (EPS) jockeys” focused on predicting profit figures rather than providing insight on stocks.

“It is utter insanity we have quarterly reporting and we ask our companies to quarterly report,” he said.

“I feel for the sell-side as they have been transformed into these quarterly EPS jockeys, manically listening to the same conference calls as us for any nuance. It’s crazy and I don’t know how we get away from it.”

However, Mr Bennett said incoming rules – which will see fund managers separate payments to brokers for equity and bond research from the share trading fees they incur – may help transform analysts' work.

As it stands, investment research is rarely given a nominal value, meaning a huge over production and inefficient market has developed. If fund managers account more accurately and only pay for valued research, this dynamic could change leading to analysts providing more substantial products.

Analysts' short-term focus had produced “pond life hedgies” and algorithms trying to outsmart markets that create sharp and short fluctuations, according to the manager. He suggested the Mifid II rules could help end this.

“Will [Mifid II] really change their behaviour? I hope so but it seems so entrenched. But It has to change.”

A potential short-term focus from his investors is also weighing on the manager’s mind. In his £272m European Focus Trust Mr Bennett has backed the market's shift towards value stocks with enthusiasm, but he remains cautious of a turnaround.

He said Europe and Japan would outperform the S&P 500 this year if the shift proved sustainable, but added: “If this fails and bond yields roll over and we go back to negative [yields], if it knocks value and banks on the head, don’t be in this fund.”

He said he would likely tolerate underperforming his benchmark by just 3 and 7 percentage points before abandoning value and returning to growth, suggesting: "You can only be as patient as your client."

The fund now has a 31 per cent allocation to financials, including several Nordic banks, as a result of the recent shift. But Mr Bennett said banks could be “good but not great” businesses, meaning few names had attracted his attention.

“There is no European banking sector, there’s the Nordics and the rest. Bankers like to lose money and they particularly like to lose it in shipping and real estate. The Nordics and the Germans have done that, but the Nordics learnt."

Mr Bennett said he was not too concerned about political risk, but acknowledged he had  cut back exposure to France amid market worries over Marine Le Pen's prominence in the French presidential election polls.