The even slower death of the stockbroker’s analyst (part 1)

Following Tim Price’s article on the slow death of the stockbroker, written from the perspective of a fund manager, here is that of an analyst insider whose City career spanned pre-big bang, when the species hardly existed, to today – when Mifid could be about to hammer a final nail into their coffin. Or maybe not.

Tim asks ‘Are analysts necessary’?  Well – they certainly weren’t before the early ‘70’s, when stockbrokers made their cosy equity commissions on ‘tips from the horses mouth’ circulating on the Stock Exchange floor (alongside the best jokes from the prisons) at a time when the steady, profitable business in gilts still fed thick reliable gravy to the brokers.

I was perhaps unusual (not to mention naive) when I entered the City in 1972 into one of the largest firms.  I arrived – after a spell in industry and management consulting – with the ridiculous notion that an analyst could help direct the nation’s savings into the most efficient use of their capital in the most efficient companies. And from an engineering background where calculations, plans, and estimates had to be 100% correct if whatever we were constructing wasn’t to collapse, sink, go slower than planned, cost more than desired, or to fail to meet all the criteria we were working to for decades into the future, I was disconcerted to discover that most brokers’ memories of their opinions and recommendations spanned no more than a few days.

That first broker, basking in gilts commissions up to a short time before, had decided to gain at least some expertise in the equities that pension funds were starting to invest in alongside gilts. But imagine the dislocation to my theory when the first analyst ‘Nellie’ whom I sat next to told me that his forecasting method was to assume a 5% (or whatever) rise in earnings, and work back from there to the profits breakdown he would publish. (In that era it was easy for a company to manipulate its accounts to show whatever result – within reason-  it – and the market – wanted.)

Minor manipulations of  recommendations and results weren’t the only practices a newcomer discovered. There were others rather more ‘Spanish’. It wasn’t unknown for smaller brokers – in order to attract them as clients – to provide fund managers with their own, separate, private dealing account, so that at the end of a two week settlement period he could put into his own account the deal he had ostensibly made for his fund, depending whether it had worked out profitably – or not.

But that is an aside. As perhaps a bit of a nerd and an engineer, I had assumed that this great institution called the stock market would have worked out some sort of professional standard for assessing companies and their futures. There was, of course, the fledgling Society of Investment Analysts. But it was dominated by actuaries brought up on gilts who weren’t interested in (and didn’t know how to) analyse individual companies.

I also wanted to work out whether and how my fellow analysts successfully found profitable situations. So I started to check all my peers’ (in other firms as well as my own) success rates.  I can truly say that among all the ‘top’ analysts those days, in all the ‘top’ broking firms, I cannot remember finding any with better than 51% of his price predictions proving correct. Most were wildly wrong – a finding supported by much research on Wall Street – and anyone who understands how analysts work – as the FCA doesn’t – will know why.

At one firm (where I had graduated into corporate finance – away from the analysts’ hurly burly) the then engineering analyst managed to get his forecast relative share performance in the year I observed them badly wrong for every single one of his 15 share recommendations. He was made head of research. The same had happened at that first large firm, where a certain analyst was notorious for also getting every one of his recommendations in his specialist sector wrong every time. He also was made head of research.

But I was the odd man out. I was only ever interested in shares which it seemed to me the market had got wrong. I wasn’t interested in the ‘maintenance’ research that fund managers (and the FCA) complain of today as wasting investors money, or in situations where the ‘consensus’ seemed right, but which in those days was all that institutions seemed to expect.  All that analysts needed to do at that prestigious firm was to cut and paste results announcements and add some sort of bland comment and ‘forecast’ before passing on to our institutional clients.

I was forever being told by the sales desk that no-one else shared my view, and as a result – it taking time for me to be proved right –  I got fed up and was lured into corporate finance at another firm – just in time to miss the £1/2 million ‘golden hello’ that all my fellow analysts at the first firm received as an incentive to stay, from the American Bank which was taking it over, ready for Big Bang!

I had realised too late that analysts’ employers rated their ability to chat to fund managers about irrelevant known detail more highly than someone disrupting the cosy ‘consensus’ atmosphere with risky ideas. Original ideas weren’t wanted (or, more probably, not expected). All institutional clients seemed to expect was an ‘expert’ whom they could quiz when necessary but whose recommendations they completely disregarded. (Which is logical. Because of course, they, unlike a sector analyst, got to see and compare all the other opportunities out there in the market.)

Those next few years in corporate finance were essentially public relations for companies wanting to float on the market, with a veneer of an ‘objective’ opinion about them. I did of course have to be a bit more accurate in making forecasts, and it was good experience working out which of the entrepreneurs who came to us really were ace businessmen – or whether they had merely been lucky with their companies to have been in the right place at the right time. I concluded the latter was most often the case.

However I baulked when, although I predicted that a would-be corporate client would go bust, I was pressured to follow the party line with a note supporting a fund raise. So I duly went out of the door, and the client duly went bust six months later. Whether it took with it the funds raised six months before I didn’t find out.

By then I was being urged to become a manager for pension funds myself, although being of a lazy disposition (and because regulation was beginning to put too many hurdles in the way) that didn’t appeal. Even so, I by now had realised that the scope for really objective research lay outside the mainstream broker-fund manager nexus.

So I jumped at the chance to join what was one of the first truly ‘research boutiques’ to emerge in London in the ‘90’s – following the experience of Wall Street after its own Big Bang. It was small, but had attracted a commission from a set of around 70 adventurous fund managers (one being Anthony Bolton – also an engineer) to seek out unrecognised companies and situations for their small to medium sized company funds.

And since we also soon after took over from the Financial Times what was then a well regarded newsletter – the Investors Stockmarket Weekly – published for 50 years since the war with many fund managers among its subscribers, it gave me the chance to combine two approaches – producing original bespoke research for our institutions, and editing the ISW for seven years until the 2000 stock market slump cut off many subscribers and we closed. But in that time our track record was better than any other if only because, as analysts, we spent more time to pull our companies to pieces than did our mainly journalist competitors. We even consistently outperformed the legendary Jim Slater (Proof IS available!)

To be continued…