Value  

AJ Bell casts doubt over analyst research

AJ Bell casts doubt over analyst research

AJ Bell has assembled data that calls into question the effectiveness of analyst research, claiming retail investors are unknowingly paying for “expensive” reports.

The group analysed the FTSE 350 and the number of broker buy, hold and sell recommendations per stock at the start of 2016 and then looked at how the most and least popular companies did across the year. 

It found the 10 FTSE 350 companies which analysts favoured the most had returned an average of just 2 per cent last year.

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By comparison, the 10 least popular FTSE 350 stocks scooped up an average return of 56 per cent.

AJ Bell figures also showed there were just 470 sell recommendations by analysts in January, compared to 1,939 buy recommendations.

According to the investment platform, these figures make sombre reading for those investment banks and brokers looking to justify hefty fees for access to their analysis.

This also comes at a time when asset managers are assessing whether to pay for research, particularly now the Financial Conduct Authority is increasingly probing the industry to ensure fund houses are not overcharging investors.

According to AJ Bell, the cost of this research amounts to billions of pounds which is routinely passed on to retail investors on top of the annual charge they pay for a fund.

Last year, one of the biggest names in the British fund management industry, Neil Woodford, decided that his clients would not have to foot the bill for research costs associated with his flagship £9.3bn Equity Income fund.

The analysis from AJ Bell also found only three of the 10 least popular stocks fell in value.

In fact, the figures indicated two of these unfavoured stocks more than doubled their value and four rose by more than 50 per cent.

FTSE 350 stocks with highest proportion of sell ratings in Jan 2016

 

Broker ratings, as of January 2016

2016 share

 

Buy

Hold

Sell

% Sells

price change

 

 

 

 

 

 

Electrocomponents

1

4

6

55%

96.0%

Wetherspoon JD

3

5

9

53%

15.5%

Coca-Cola HBC

0

8

8

50%

14.8%

Evraz

1

6

7

50%

195.8%

Vedanta

2

3

4

44%

230.7%

Rotork

1

11

8

40%

33.2%

Morrisons

4

9

8

38%

54.3%

Persimmon

0

5

3

38%

-14.4%

Intl. Pers. Finance

5

0

3

38%

-41.2%

TalkTalk Telecom

5

7

7

37%

-23.2%

AVERAGE

 

 

 

44%

56.2%

 

 

 

 

 

 

FTSE 350

1,939

1,598

470

48%

12.5%

Source: Digital Look, www.brokerforecasts.com. Broker ratings data compiled on 22 January 2016. Performance data covers calendar 2016.

Dan Farrow, director of SBN Wealth Management, said: “Most analysts were predicting a flat year, so it is no surprise that a bounce caused predictions to be re-written.

However, he said the least popular stocks are probably the smallest or least liquid shares.

"Regardless of the Chinese walls that are supposed to be in place, analysts will write research to generate dealing and corporate finance fees for the banks or brokerage they work for." 

Mr Farrow also said the majority of analysts don’t understand two fundamental aspects: the first being how a balance sheet works and how this makes or breaks a business, and second the lack of understanding of how a company is actually run.

"All fund management houses pay for the research one way or another, although why a fund manager can’t do his or her own research is really an important question, but then most of them used to be analysts."