Foto: jniittymaa0. El uso de ETFs se está acelerando en América Latina
Aunque los ETFs son una adición relativamente reciente a la inversión institucional en América Latina, están asumiendo rápidamente un papel importante como herramienta de los gestores institucionales latinoamericanos. Basándose en los resultados de entrevistas con 50 instituciones en América Latina, Greenwich Associates espera que su uso se acelere en América Latina.
El estudio concluye que, al igual que sus contrapartes en otras regiones, la mayoría de las instituciones latinoamericanas están comenzando con asignaciones relativamente pequeñas a los ETF, principalmente con exposición a renta variable. «A través de estas inversiones iniciales, las instituciones están descubriendo la eficiencia y versatilidad que los ETFs pueden aportar a sus carteras de inversión. A medida que lo hacen, están ampliando su uso de ETFs a renta fija y otras clases de activos» señala Andrew McCollum, autor del estudio, quien añade que las instituciones latinoamericanas están introduciendo a los ETFs principalmente como un medio para obtener exposiciones estratégicas a largo plazo y para diversificar las carteras. Luego utilizan a los ETFs para una serie de aplicaciones adicionales, que van desde los ajustes tácticos y así como para mejorar la liquidez de la cartera.
Las instituciones latinoamericanas que utilizan ETFs hoy en día invierten un promedio del 7,6% del total de sus activos en ellos, y se espera ver un crecimiento de ese porcentaje en 2017. De las instituciones latinoamericanas que actualmente invierten en ETFs, el 68% espera aumentar las asignaciones el próximo año, con 64% de planificando un aumento de más del 10%. Más de dos tercios de las instituciones latinoamericanas que actualmente invierten en ETFs de renta fija planean aumentar las asignaciones en el próximo año. Greenwich Associates espera que las tasas de crecimiento de los ETF se aceleren debido a varias tendencias:
Las instituciones de todo el mundo están experimentando con nuevas e innovadoras estructuras de fondos ETF para ayudarles a manejar niveles crecientes de volatilidad y otros desafíos que enfrentan sus carteras. En América Latina, más del 50% de los inversionistas institucionales de ETF invierten en smart beta, y la mitad de estos usuarios planean aumentar las asignaciones a esos ETFs en los próximos 12 meses. La demanda parece ser la más fuerte para los ETFs de smart beta que generan ingresos y ayudan a las instituciones a manejar la volatilidad.
Los impedimentos actuales a la inversión se darán a medida que las instituciones latinoamericanas adquieran experiencia con los ETF. Factores como la disponibilidad limitada de ETFs, las directrices internas de inversión que limitan o prohíben el uso, y las preocupaciones sobre la liquidez y los gastos del ETF han ralentizado inicialmente la adopción de ETFs en otros mercados. Todos estos factores se han relajado con el tiempo, ya que las instituciones vieron a los adoptantes tempranos usarlos de manera segura y eficaz.
Las instituciones seguirán integrando los ETFs en la combinación de vehículos de inversión que emplean en sus carteras, junto con y como reemplazo de derivados y otros productos. Casi el 60% de las instituciones que utilizan derivados han diversificado su combinación de vehículos de inversión en el último año reemplazando una posición de futuros existente por un ETF, principalmente por su simplicidad operativa y reducción de costos. De cara al futuro, el 42% de los usuarios de ETFs planea evaluar las posiciones de futuros existentes tanto en renta variable como en renta fija para su posible reemplazo.
La demanda institucional de ETFs en América Latina se verá impulsada por la continua proliferación de fondos multi-activos. Siguiendo una tendencia mundial, aproximadamente el 40% de los gestores de activos latinoamericanos que invierten en ETFs los utilizan en fondos multi-activos y están invirtiendo el 14% del total de sus activos en ETFs. Mientras los gestores latinoamericanos lanzan fondos multi-activos, Greenwich Associates espera que las asignaciones a ETFs dentro de esos fondos aumenten.
Los ETF en formato UCITS brindarán nuevas oportunidades de inversión. Los inversores latinoamericanos están comenzando a iniciar sus operaciones con UCITS y según McCollum se sorprenden gratamente por sus beneficios, incluyendo la eficiencia fiscal y operacional. A medida que las instituciones se familiaricen con los ETF y busquen nuevas maneras de emplearlos, los ETFs en formato UCITS se convertirán en una parte significativamente mayor del universo de inversiones latinoamericano.
From barter to cash to checks to online banking, money is an evolving technology that has been part of human history for thousands of years. While cash is expected to remain a significant payment instrument in the near future, Melissa Lin, Finance Editor at Toptal, believes factors such as “contactless” pay systems, increasing mobile penetration, and high costs of cash (ATM fees for individuals, cash storage for businesses, currency printing for governments, etc.) are prompting society to reconsider its ubiquity.
She states as an example, the case of countries like Sweden and India, as well as the EU region, which are adopting cashless habits or policies. «Driven by “contactless” pay technology, increasing digital penetration, costs of using cash, and policy initiatives, the idea of a cashless society is no longer a figment of the imagination.» She says.
Lin believes that in the near term, we are likely to witness a transition to less-cash societies, rather than a switch to cashless societies. Cash still accounts for 85% of total consumer transactions globally. Among established alternatives to cash, cards are the fastest growing payment instrument.
As cashless economy pros she identifies the increased scope for monetary policy, reduced tax evasion, less crime and corruption, savings on costs of cash, and accelerated modernization of citizens. While listing as cons: potential violation of privacy, increased risk of large scale personal and national security breaches, and technology-dependent financial inclusion.
Migrations to a cashless economy include considerations ranging from the purely financial, to those social in nature. Consequently, a country’s specific technological, financial, and social situations will inform its specific benefits, drawbacks, and approach to such a transition. In her opinion, the countries best positioned to go cashless include the US, the Netherlands, Japan, Germany, France, Belgium, Spain, Czech Republic, China, and Brazil.
«We are likely approaching a less-cash future, not a completely cashless future. And, while progress has been made in this transition, it has hardly been universal or uniform. A migration to a cashless economy includes considerations ranging from the purely financial to those social in nature. Consequently, a country’s specific technological, financial, and social situations will inform its specific benefits, drawbacks, and approach to such a transition.» She concludes.
Formado en 2017 de la fusión entre Janus Capital Group y Henderson Global Investors, tenemos el compromiso de añadir valor a través de la gestión activa. Gracias a esto, nuestros clientes tienen la oportunidad de recibir una rentabilidad superior a la de las carteras pasivas durante los distintos ciclos del mercado. Asumimos unos niveles apropiados de riesgo y ofrecemos productos y estrategias por con unas comisiones razonables. Las previsiones para el futuro cercano indican que los mercados seguramente ofrezcan una rentabilidad menor en términos relativos, y que estén más volátiles de lo que lo han estado durante la última década. Con este panorama cobra un protagonismo esencial el valor de la gestión activa.
Existen tres principios claves que sustentan y definen el modo en que trabajamos:
Situamos a los clientes primero
Actuamos como propietarios
Nuestro éxito es colectivo
La gestión activa no se limita únicamente a nuestro enfoque de inversión y nos preocupamos apasionadamente por la calidad de nuestros productos y los servicios que ofrecemos. Aunque nuestros gestores de inversión tienen la libertad de seguir los métodos que mejor se adaptan a su área de especialidad, nuestro personal colabora conjuntamente a modo de equipo. Esto se refleja en el espíritu de nuestro lema «Conocimiento Compartido» (Knowledge.Shared), que representa el diálogo mantenido en toda la entidad y fomenta nuestro compromiso de capacitar a los clientes para que tomen mejores decisiones de inversión y negocio.
Estamos orgullosos de ofrecer una gama de productos sumamente diversificada que saca provecho del capital intelectual de algunos de los pensadores más innovadores y especializados del sector. Nuestras competencias abarcan las principales clases de activos, contamos con equipos de inversión situados en todo el mundo y atendemos a inversores, tanto particulares como institucionales, a escala mundial. Tenemos 305.000 millones de euros en activos bajo gestión, más de 2000 empleados y 28 oficinas repartidas por todo el mundo*. Con sede central en Londres, somos una gestora de activos independiente que cotiza por partida doble en la Bolsa de Nueva York y en la Bolsa de Valores de Australia.
This past year, Bolton Global, one of the 50 largest independent broker dealers in the United States, has seen its team of financial advisors grow substantially throughout the country, and especially in Miami, an important place in the international wealth management industry. The firm has announced the appointments, which, in turn, served as a call for other advisers contemplating, or in the process of, a change. From November 2015 to December 2016 the digital version of Funds Society has published such a series of appointments – The Perez Group, Eduardo Robson, Daniel Aymerich, Soraya Batista-Gracía, Eddie Moreno, Alex Astudillo, Ángela Canas, Tanya Duarte and Archivaldo Vásquez, Felipe Ballestas, Oscar Guevara, Samuel Nunez, Ricardo Morean, and Christian Felix – that we wanted to speak with Ray Grenier, CEO of the firm, to discover the keys to this firm’s irresistible model.
Bolton Global is one of the 50 largest independent broker dealers in the US. With 32 years of track history and 45 branch offices, it ranks among the top of independent firms in annual revenue and AUM per producing FA, across the US. This last year, Bolton Global has seen more than 15 advisors with international clients join the firm, many of whom are based in Miami.
What is the key? Why do financial advisors choose to join Bolton Global? How do they arrive at the firm and what does it offer them? «We do not have an FA recruiting team, we have grown fundamentally through word of mouth.» The best tool to attract new teams of financial advisors are the FAs that already work in Bolton, who refer other teams with quality assets and extensive experience. «A happy team that has the full support of the organization to carry out its work is the best ambassador to attract new talent to the firm,» says its CEO.
Ray Grenier, CEO explains: “Our platform allows FAs to establish their own brand name, capture the equity in their book of business and generate a substantially higher net income after expenses. Bolton provides turnkey solutions to incorporate the business, develop a company logo and company promotional materials, develop and establish a professional website, set up office infrastructure and train staff. We also provide all of the back office and compliance support to process the business efficiently and effectively in accordance with industry rules and regulations.
Through Bolton, FAs have access to all of the capabilities, products and services available through the major wirehouses and private banks.”
We are talking about Financial Advisors who had prior successful careers at the major US wirehouses in 90% of cases, with a client book of over $100 million and 15 or more years of industry experience. Most of them are US citizens or visa holders. Bolton also has several affiliated financial advisors operating from offshore locations in a fully registered capacity.
When talking about attracting clients, Grenier says the financial crisis of 2008 highlighted the importance of financial institution safety and security. BNY Mellon is a global financial institution with the highest safety rankings among the largest US banks. This provides clients with the security that their assets are held through a solid financial institution which also supports international business.
He adds: “BNY Mellon is the oldest US bank, founded by Alexander Hamilton in 1784 and is the world’s largest custodian with more the $30 trillion in assets under custody. It’s clearing subsidiary, Pershing is the world’s largest clearing firm servicing over 100,000 financial advisors working at financial institutions in over 60 countries.
In addition to providing clients with superior safety and security, the BNY Mellon companies furnish Bolton with all of the capabilities, products and services of the major wirehouses and private banks for both domestic and international clients.
As an independent firm, Bolton offers clients a pure wealth management play as the firm does not engage in investment banking or underwriting and generally avoids illiquid products.”
Bolton has a wide mix of customers from the United States, Latin America and Europe. Among the international clients, the firm has a strong representation in Argentina, Spain, Uruguay, Mexico and Panama.
The average account size is over $500,000 with the average relationship over $1 million. Portfolios hold a mix of stocks, bonds, ETFs and mutual funds managed either by the FA or by third party asset managers.
In the international business, around 40-50% of the assets are in mutual funds. Bond portfolios also prevail, as is customary in Latin American clients. Ray Grenier also points out that some of its representatives work with portfolios of UCITS ETFs domiciled in Europe, which represent a tax advantage over US-based ETFs.
Although Pershing is able to carry out the full range of services its clients require, Bolton’s financial advisors (FAs) can also work with a number of local banks that offer advantageous conditions for leveraging their asset portfolios, including international mutual funds. Thus, the FAs that join the Bolton platform can carry out the transition of the assets of their clients without losing functionalities over the broker dealers in which they worked previously.
Bolton provides FAs with a complete set of research tools to manage their client portfolios including recommended buy-sell lists, model portfolios, analytics, and performance reporting. Financial advisors have the flexibility to advise clients on the composition of their investment portfolios in accordance with the client’s objectives and risk profile. “In addition, FAs can use our Separately Managed Account (SMA) platform with access to more than 100 major asset management firms with multiple investment styles to construct and rebalance portfolios on a discretionary basis.” The CEO says. Approximately 40 percent of the business is fee based with 60 percent conducted on a commission or transactional basis.
In addition to portfolio management, Bolton offers clients the full range of account services including on-line account access, BNY Mellon VISA card, check-writing, ACH and bill payment, portfolio lending, multicurrency holding and reporting as well as trustee services. Bolton also provides access to execution and clearing on exchanges in 45 countries.
Goals
Over the last 5 years, Bolton has increased revenue and AUM by an average of 17 percent annually. The company experienced 23 percent growth in 2016. Grenier, says, excited: “We believe that industry conditions will continue to be favorable to Bolton allowing the firm to grow in the 15 to 20 percent range for the next 5 plus years.”
Among the most immediate expansion plans for the branches, the leader says: “The company believes that the Miami market will offer continued strong growth opportunities for the next several years.” He announces Bolton is in the process of opening an office in New York City to house a major wirehouse team that will be joining the firm in 2017 and reminds the firm opened an office in San Diego last year. Additionally, they are evaluating real estate options in Houston. «It’s a market that we look favorably on to open a new office because the establishment costs are relatively low – especially the cost of renting the office – and the international wealth management market has clear potential.» However, for the moment the growth focus for the non-resident business is still in Miami.
The environment and its good consequences
There is no doubt that Bolton Global’s business has grown as a result of the strategic shift of some firms with respect to its international clients. In Grenier’s words: “Many major financial institutions have withdrawn or significantly curtailed their servicing of international clients over the last 5 years. Bolton has definitely benefited from this environment. Sustainability in the international wealth management business requires a firm to limit account opening for only the highest quality clientele and to commit significant resources to AML compliance and surveillance.”
But Bolton has been in market for many years now. “Bolton recognized the potential of the international market as early as 2008 when a Merrill Lynch team in Texas with a non-resident clientele joined the firm. In recruiting from the major wirehouses and private banks, we realized that FAs from these firms would be more likely to convert to the independent business model if we provided them with a complete turnkey package to transition their book including brand development, office infrastructure, staff training and on-site support.”
In Dec 2016, Bolton had 30 international FAs managing aprox. $3.5 billion, and in the last year those advisors joining the firm’s Miami office collectively manage over $1.2 billion in client assets. In 2016, the firm added 5 teams and 5 individual FAs with over $1.5 billion in AUM. (Note: As a significant amount of these assets are still in the process of transfer, they would not all be included in the $3.5 billion number cited above.)
They are all in the process of monetizing the value of their book, improving their compensation and growing their practices with a supportive business partner. All of the recruits mentioned above have joined the firm as a result of a referral or recommendation by another Bolton advisor.
“The firm has the benefit of a robust pipeline of recruits to continue to add high quality teams through 2017 and beyond. In any case, we do not want to have a multitude of FAs, but a good ratio of assets and revenues per representative, «says Ray Grenier, giving clear priority to quality over quantity.
Foto: TJDtrader. El capital movilizado en el mercado de M&A mexicano aumentó un 439% en abril
El mercado de M&A en México ha contabilizado en abril de 2017 un total de 21 operaciones, de 9 cuyo importe se conoce, se suman 1.921 millones de dólares, de acuerdo con el informe mensual de Transactional Track Record. Estos datos reflejan una tendencia estable en el número de operaciones y un aumento del 439,19% en el importe de las mismas respecto a abril de 2016.
Por su parte, en lo que va de año se han producido un total de 87 transacciones, con 34 operaciones sumando 8.666 millones de dólares, lo que implica un aumento del 4,82% en el número de operaciones y un descenso del 2,46% en el importe de las mismas, respecto al mismo período del año pasado.
De las operaciones contabilizadas a lo largo del año, 18 son pequeñas transacciones (importes inferiores a 100 millones de dólares), 10 transacciones medianas (entre 100 y 500) y seis son grandes transacciones (superior a 500 millones de dólares).
En términos sectoriales, el Financiero y de seguros y el sector Inmobiliario, son los que más transacciones han contabilizado a lo largo de 2017, con un total de 15 y 12 operaciones, respectivamente, seguidos por el sector de Salud, higiene y estética, con siete registros; e Internet, con seis negocios.
Ámbito Cross-border
Por lo que respecta al mercado cross-border, en el transcurso del año las empresas mexicanas han apostado por invertir principalmente en Estados Unidos y Colombia, con siete y cuatro transacciones, respectivamente. Y por importe movilizado en este segmento se destaca de nuevo a Estados Unidos, con 2.410 millones de dólares.
Por otro lado, Estados Unidos, España y Canadá, son también los países que más han apostado por realizar adquisiciones en México, con 10, siete y cuatro operaciones, respectivamente. Por importe destacan en este mes Estados Unidos, con 1.312,40 millones de dólares, y Canadá, con 514,89.
Private Equity y Venture Capital
En lo que va de año se han producido un total de 9 transacciones de private equity, con un descenso del 25% con respecto al mismo periodo de 2016.
Por su parte, en 2017 se han contabilizado 11 operaciones de venture capital, con un aumento del 22%, y un capital movilizado de 72,17 millones de dólares en dos transacciones divulgadas, lo cual representa un aumento del 256%.
Pricing is one of the most important financial levers that companies have at their disposal to influence the financial success of their business. However, it is not an easy task.
As Tayfun Uslu, Finance Expert at Toptal states, firstly, pricing affects multiple stakeholders, both inside and outside the company. «Experimenting with pricing is therefore not a task that should be taken lightly. Secondly, finding the right price is notoriously hard. Customer preferences are hard to gauge ex-ante, and internally, it can be difficult to foresee the effects of pricing changes on the financial performance of a company. And finally, of course, pricing doesn’t happen in a vacuum. In any competitive market, pricing changes can often lead to retaliatory actions which end up canceling out the intended effect of the pricing adjustment.»
With this in mind, techniques and methods for getting around these challenges, such as Software as a Service (SaaS) are extremely useful. In his experience, «the SaaS business model and its delivery mechanism have important ramifications related to pricing which, in turn, can be extremely useful in the financial management of your company» and, amongst other things, very pricing-friendly. Reason why he believes the shift to SaaS from On-Premises software is likely to continue at a steady pace.
To know more about the ramifications and benefits of SaaS, visit Toptal.
Whilst the equity research industry worldwide has endured substantial declines since 2007, there are still roughly 10,000 analysts employed by investment banks, brokerages, and boutique research firms. And even more analysts offer their services independently or on a freelance basis, and there are still more voices in the crowd contributing to blogs or sites like SeekingAlpha.
The reason for the above is clear: equity research provides a very useful function in our current financial markets. Research analysts share their insights and industry knowledge with investors who may not have them, or may not have the time to develop them. Relationships with equity research teams can also provide valuable perks, such as corporate access, to institutional investors.
Nevertheless, despite its obvious importance, the profession has come under fire in recent years.
Analysts’ margin of error has been studied, and some clear trends have been identified. Some onlookers bemoan the sell-side’s role in stimulating equity market cyclicality.
In some cases, outright conflicts of interest muddle the reliability of research, which has prompted regulation in major financial markets. These circumstances have generated distrust, with many hoping for an overhaul of the business model.
With the above in mind, I’ve divided this article into two sections. The first section outlines what I believe the main value of equity research is for both sophisticated and retail investors. The second looks at the pitfalls of this profession and its causes, and how you should be evaluating research in order to avoid these issues.
Why Equity Research is Valuable
Sophisticated Professional Investors
As sophisticated or experienced investors, you likely have your own set of highly developed valuation techniques and qualitative criteria for investments. You will almost certainly do your own due diligence before investing, so outside parties’ recommendations may have limited relevance.
Even with your wealth of experience, here are some things to consider.
To maximize the use of your time, buy-side professionals should focus on the research aspects that complement their internal capacities. Delegation is vital for every successful business, and asset management is no different. External parties’ research can help you:
Secure enhanced corporate access
Gain deeper insights
Outsource tedious, low-ROI research
Generate ideas
Gain context
Enhanced Corporate Access
Regulations prevent corporate management teams from selectively providing material information to investors, which creates limitations for large fund managers, who often need specific information when evaluating a stock.
To circumvent this, fund managers often have the opportunity to meet corporate management teams at events, hosted by sell-side firms that have relationships with executives of their research subjects.
Buy-side clients and corporate management teams often attend conferences that include one-on-one meetings and breakout sessions with management, giving institutional investors a chance to ask specific questions.
Language around corporate strategies, such as expansion plans, turnarounds, or restructuring, can be vague in conference calls and filings, so one-on-one meetings provide an opportunity to drill down on these plans to confirm feasibility.
Tactful management teams can confirm the legitimacy and plausibility of strategic plans without violating regulations, and it should quickly become obvious if that plan is ill-conceived.
Institutional clients of sell-side firms also have the opportunity to communicate the most relevant topics that they want to see addressed by company management in quarterly earnings conference calls and reports.
Deeper Insight
The sell-side analyst’s public role and relationship with corporate management also allows him to strategically probe for deeper insights. Generally, good equity research demonstrates the analyst’s emphasis on teasing out information that is most relevant to institutional clients. This often requires artful posing of incisive questions, which allows management teams to reach an optimal balance of financial outlook disclosure.
Buy-side analysts and investors have a massive volume of sell-side research to comb through, especially during earnings season, so succinct, analytical pieces are always more valuable than reports that simply relay information presented in press releases and financial filings. If these revelations echo the interest or concerns of investors, the value is immediately apparent.
Outsourcing Tedious or Low-ROI Aspects of Research
Smaller buy-side shops may lack the resources to monitor entire sectors for important trends. These asset managers can effectively widen their net by consuming research reports. Sell-side analysts tend to specialize in a specific industry, so they closely track the performance of competitors and external factors that might have sector-wide influence. This provides some context and nuance that might otherwise go unnoticed when concentrating on a smaller handful of positions and candidates.
Research reports can also be useful ways for shareholders to spot subtle red flags that might not be apparent without carefully reading through lengthy financial filings in their entirety. Red flags might include changes to reporting, governance issues, off-balance sheet items, and so forth.
Buy-side investors will of course dig into these issues on their own, but it’s useful to have multiple eyes (and perspectives) on portfolio constituents that may number in the hundreds. Likewise, building a historical financial model can be time consuming without providing the best ROI for shops with limited resources. Sell-side analysts build competent enough models, and investors can maximize their added value by focusing entirely on superior forecasting or a more capable analysis of the prepared financials.
Idea Generation
Identifying investment opportunities falls under the umbrella of tedious activities since effectively screening an entire market/sector can be overwhelming for a smaller team at some buy-side shops. As such, idea generation has become an important element of some sell-side firms’ offerings. This is especially pronounced regarding small and medium cap stocks, which may be unknown or unfamiliar, to institutional investors.
It’s simply impractical for most buy-side teams to cover the entire investable universe.
Research teams fill a niche by identifying promising smaller stocks or analyzing unheralded newcomers to the market.They can then bring this to the attention of institutional investors for further scrutiny.
Creating Context
Reports might be most useful for sophisticated investors as an opportunity to develop a meta perspective. Stock prices are heavily influenced by short-term factors, so investors can learn about price movements by monitoring the research landscape as a whole.
Consuming research also allows investors to take the temperature of the industry, so to speak, and compare current circumstances to historical events. History has a way of repeating itself in the market, which is driven in part by the industry’s tendency to shake during crashes, and pull in new professionals during bull runs.
Having a detached perspective can help shed light on cyclical trends, making it easier to identify ominous signals that might be lost on the less acquainted eye. In turn, this drives idea generation for new investing opportunities.
With that being said, investors should not consume research that only confirms their own bias, a powerful force that has clearly contributed to historical booms and busts in the market.
Retail Investors
The value of equity research is much more straightforward for retail investors, who are usually less technically proficient than their institutional counterparts.
Retail investors vary substantially in sophistication, but they mostly lack the resources available to institutional investors. Research can supplement deficiencies on some basic levels, helping investors with modeling guidance, framing an investment narrative, identifying relevant issues, or providing buy/sell recommendations.
These are great starting points for retail investors seeking value out of research. Individuals probably can’t consume the sheer volume of reports that asset managers can, so they should lean on the expertise of trustworthy professionals.
What are the risks associated with equity research?
Despite the above, there are clear risks to over-relying on equity reports to make trading decisions. To properly assess the dangers of equity research, one must consider the incentives and motivations of research producers.
Regulations, professional integrity, and scrutiny from clients and peers all play significant roles in keeping research honest, but other factors are also at play. Research consumers should be mindful of the producer’s business model. I highlight the five key issues below.
Equity research can be exaggerated due to the need to drive trading volumes
Reports that are produced by banks and brokers are usually created for the purpose of driving revenues. Sell-side equity research is usually an add-on business to investment banks that earn significant fees as brokers and/or market makers in traded securities and commodities.
As a result of this, research tends to focus on highlighting opportunities for buying and selling stocks. If research reports only included forecasts of “steady” performance, this would result in less trading activity. The incentive for research analysts is therefore to come out with predictions of a change in performance (whether up or down).
This isn’t to say the content of the research is compromised, but that opinions on directional changes in performance may be exaggerated.
Numerous academic studies and industry white papers are dedicated to estimating the magnitude of analyst error. The findings have varied over time, between studies and among different market samples. But all consistently find that analyst estimates are not particularly accurate.
Andrew Stotz indicates an average EPS (earnings per share) estimate error of 25 percent from 2003 to 2015, with an annual minimum under 10 percent and annual maximum over 50 percent.
Research analysts may avoid criticizing companies they cover due to the need to maintain a positive working relationship
Another important point to consider is that analysts generally benefit from having a positive working relationship with the executive management and investor-relations teams of their research subjects.
Analysts rely on corporate management teams to provide more specific and in-depth information on company performance that is not otherwise publicly provided.
Brokers also provide value to investors by providing seminars and one-on-one meetings that are attended by those executive teams, so a strong roster of presenters at conferences can be dependent on the relationships built by the research teams.
I’ve witnessed the negative impact of a souring relationship: One of the tech analysts at a company I worked for was covering a small-cap stock and built up a good relationship with both the corporate management team and the investor relations person who worked with them. Being a small company, this visibility was valuable to the research subject.
Poor results one quarter were downplayed by management as a temporary speed bump, but the analyst had concerns that these were longer-term problems.
The executive team was upset when the subsequent report negatively portrayed the recent events, and soon thereafter withdrew from an upcoming conference our research firm hosted. The analyst’s bonus compensation suffered as a result as well.
Obviously, this all has very serious implications.
Sell-side analysts tend to produce reports that portray their subjects favorably, and they are more likely to set attainable expectations. It also means that analysts may hesitate to downgrade a company’s stock. This is especially true when poor executive management would be the primary culprit causing a downgrade. All of this may help explain why EPS estimates are disproportionately bullish (see chart 2).
Research analysts may avoid making contrarian calls due to the need to maintain good reviews and a trusted reputation.
Equity research reports are influenced by the means by which analyst quality is measured. Analysts compete with peers at rival banks.
Taking a contrarian stand that results in bad recommendations could genuinely harm an analyst’s compensation and career prospects. These mechanisms create a herd-like mentality.
This can be extremely detrimental if it goes unnoticed or unaddressed by research consumers. These are precisely the sorts of circumstances that fuel bubbles. It’s hard to look especially foolish if everyone else looks foolish too.
Independent equity research may be sensationalized due to the need to stand out.
Research produced by independent firms, which substantially derive all revenues from the sale of research and do not maintain a brokerage business, is not meant to motivate trading.
This eliminates some of the conflicts of interest inherent in the sell-side banks, putting extra emphasis on accuracy. However, independent and boutique analysts are tasked with creating income by selling something that’s been largely commoditized, and they compete with banks that have vast resources.
To survive, they have to offer something specialized or contrarian. Their philosophy must radically depart from the herd. They have to claim special industry knowledge through independent channels, or they must cover stocks that are largely uncovered by the larger powers in the research space.
This creates the incentive for sensationalized research that can attract attention amongst the sea of competing reports.
Putting it all together
As we have seen, there are important facets of the equity research profession that often lead to skewed incentive mechanisms, and may ultimately compromise the quality of research being done.
To be fair, the practice of making complex and precise forecasts is necessarily flawed by the requirement to make assertions about future conditions, which by definition are unknowns.
Nevertheless, whilst this might be acceptable if the errors appeared random and with a predictable margin of error, this is not the case.
According to Factset research, consensus 12-month forward EPS estimates for S&P constituents were about 10 percent higher than the actual figures for the years 1997-2011. These numbers are skewed by large misses, and the median error is only 5.5 percent, but several important conclusions can be drawn:
Analysts tend to be too bullish. In 10 of those 15 years, consensus estimates were higher than the reported figures.
Analysts were especially bad at navigating recession periods, overcooking their numbers by 36 percent in 2001 and 53 percent in 2008. The error is less extreme for years with rapid EPS growth. Forecasts only lagged actual results by eight percent in 2010, indicating asymmetric tendencies to misforecast earnings.
How can you avoid equity research pitfalls?
There are several ways that consumers of research reports can judge the validity and quality of such reports,in light of what’s been discussed above.
Analyst Credentials
Analyst credentials are an obvious method for vetting quality. CFA designations don’t necessarily guarantee quality, but it indicates a baseline level of competency.
Research produced by reputable banks ensures that it was created and reviewed by a team of professionals with impressive resumes and highly competitive skills. Likewise, veterans of big banks who leave to start an independent shop have been implicitly endorsed by the HR departments of their former employers.
Producers can also be distinguished by specialized backgrounds, for example former doctors turned healthcare analysts or engineers weighing in on industrial/energy stocks. If the analyst has been recognized in financial media, it usually indicates extremely high quality.
Analyst Track Record
Investors can also look at historical analyst recommendations and forecasts to determine their credibility.
Institutional Investor provides a service that tracks analyst performance, and there are similar resources available, especially for investors with deep pockets.
Fintech startups, such as Estimize, actually focus on attracting and monitoring analyst recommendations to identify the most talented forecasters.
However, while third-parties and financial media offer helpful ranking systems based on earnings forecasts or performance of analyst recommendations, these tend to put a lot of emphasis on short-term accuracy. This might therefore be less useful for consumers with a long-term approach or emphasis on navigating black swans.
Investors should consider these factors and look for red flags that an analyst is hesitant to turn bearish. These could include shifting base assumptions to maintain growth forecasts and target prices, suddenly shifting emphasis away from the short-term to the long-term outlook, or perhaps an apparent disconnect between the material presented in the article and the analyst’s conclusions.
Investors should also consider context.
Some stocks simply don’t lend themselves to reliable research. They might have volatile financial results, an unproven business model, untrustworthy management, or limited operating history, all of which can lead to wide margins of error for earnings growth and intrinsic value.
The business cycle’s phase is also extremely important. Research shows that forecasts are less reliable in downturns, but investors are also more likely to rely most heavily on research during these times. Failure to recognize these issues can severely limit one’s ability to glean full value from research.
Research consumers should also make sure they know their own investment goals and be mindful about how these differ from those implied by research reports. A temporal mismatch or disconnect in risk aversion could completely alter the applicability of reports.
Consume a lot of research, and hold analysts accountable
For those fund managers wishing for a more reliable research product, the most effective move is to vote with your wallets, and buy reports from the most accurate and conflict-free sources.
It might be expensive to source research from multiple sources, but there’s value in diversifying the viewpoints to which you are exposed. It’s unlikely that you will move on from low-quality research if that’s all you are reading.
Additionally, consuming a large volume of research from different sources helps forge a meta perspective, allowing investors to identify and overcome worrisome trends in research.
Equity Research Continues to be Useful, but Should be Consumed Thoughtfully
The equity research industry has undergone profound changes in recent years, due to regulatory changes, the emergence of independent research shops, as well as more automated methods of analyzing public company performance.
At the same time, smart investors are looking at broader sets of investments and taking a more active approach to research. This is facilitated by the increasing quantity of publicly available information on listed companies.
Nevertheless, good research continues to be extremely valuable. It lets you manage a wider pipeline of investment opportunities and be more efficient.
An informed and thoughtful approach can enhance the value of research reports for investors, so asset managers can better serve clients (and their own bottom lines) by considering the content above.
Research consumers need to be wary of predictable errors, analyst incentives, conflicts of interest, and the prevalence of herd-like mentality.
If you can adjust your interpretation of research along these lines, then you can focus on the most valuable aspects of research, namely idea generation, corporate access, and delegation of time-consuming activities.
Pixabay CC0 Public DomainNational Doral Golf Course. IV torneo de golf de Funds Society
Funds Society prepara su IV Torneo de Golf el jueves, 9 de marzo, en el Campo de Golf Doral Nacional (Palma de Oro).
En el evento, los participantes podrán aprovechar la oportunidad para discutir sobre mercados globales junto con gestores de Henderson Global Investors y M&G Investments, así como disfrutar de un torneo de golf y diversas oportunidades de networking.
La cita es a partir de las 9.30 de la mañana con un desayuno de bienvenida, seguido de charlas con Guy Barnard y Chrisophe Machu, un almuerzo y el torneo, que concluirá con un cóctel y ceremonia de premios a partir de las 6.00 de la tarde.
Para reservar su lugar envíe un correo electrónico a info@fundssociety.com o llame al +1 786 254 7149.
2017 will, not in the least, be a quieter year than 2016, and from Amundi analysts point out three key issues to watch: the consequences of Donald Trump’s presidency in the US, the upcoming elections in Europe, and the negotiations over Brexit which, according to Philippe Ithurbide, Global Head of Analysis and Strategy in Amundi, are not priced into the markets. «The consequences for Europe and the United Kingdom will be greater than is believed, and the probability for the UK to get everything it wants is zero: you cannot have everything without paying a price for it.» The expert, who does not believe that the process will be canceled, or that it will be short, predicts long negotiations, lasting many years, which will lead to painful consequences for both the EU and the British. But, despite all of the above, his star commitment for this year is the European stock exchange.
In 2017, growth will not expand beyond 3% (with the exception of markets such as Brazil, Russia or the USA, which will increase their growth), due to the impetus of protectionism, the fall of global trade, and the weakness of the investments, and in which neither is inflation going to spiral (in more than 80 countries throughout the world, the expectations of inflation surpass reality, in some cases there are negative inflations and in Europe it has not arrived yet, he says), the expert explains that the fund management company plans to reduce positions in US stocks and bonds markets (in which they strongly positioned themselves months ago) and to allocate part of those investments to Europe (both stocks and credit) and also to the emerging world.
«In the United States, markets have risen greatly, but neither growth, nor inflation, nor the Fed justify those levels,» explains Ithurbide, who only expects two rate hikes in the US during the year. «After the election, the market became more expensive and we decided not to be short because the momentum was there, but now we can say that the US market is preparing a bubble,» he adds.
He says, however, «in European equities, valuations are more attractive, there is more potential for profit growth, and dividends are the highest in the developed world,» he adds. Which is something that Alexandre Drabowicz, global Co-Head of Equity in Amundi, confirms: «Unlike at other times when profit expectations were high, this year starts from a very low base so that there is room for surprises» , He says, and predicts improvements in sectors such as energy and banks. The management company does not think there will be a re-rating of the asset, but believes that the European stock exchange will be revalued due to the effect of profits, as the expert expects a growth of 10%, coupled with dividend yields of 4% that lead him to predict «very decent returns».
The fund manager is also very positive with the Japanese stock exchange, which has been the best after the US elections, due to the effect of a low yen, and where he sees «tremendous opportunities from a stock picking point of view», also in part because of the inflows that will come from pension fund investments and the return of foreign investors, net sellers of the asset last year, who could begin to return.
Emerging Markets: A constructive vision
Their vision is also very constructive in emerging equities, given the economic adjustment of recent years and improvements in current account balances, their attractive valuations (with a discount of 25% -30% in some markets), their cheap currencies (which will be another catalyst for profitability), and also by the low investor positions: «Many investors are underweight in this asset in their portfolios, but will have to reduce those positions: in 2016 they took a first step when entering into emerging debt, and if they go one step further and enter into emerging equities – even if only to place that underweight in a neutral position – they could strongly boost stock market returns. «
The management company is committed to markets with good stories of internal growth (more so than external, in a world that is decelerating globally) with emphasis on countries such as India (where, for example, they’re playing on banking history, since in the last 18 months more than 200,000 current accounts opened, and it is a market in which Pension funds are opening up their investments to the country’s stock), the Philippines, Russia or China. In Latin America, these stories are harder to find, because their economies are more closely tied to commodities, although Peru would be the country of choice. They are underweight in Brazil and, although they are reducing that position somewhat, they believe that it is difficult to be positive with the political problems facing the country. It would also be difficult to commit to markets like Turkey (where they have not invested for years), but the fund manager does support Mexico’s investment case: «There may be volatility, the peso may fall even further… but we will reassign positions gradually, it is a candidate for it,» he says.
Latin America… Debt is Best
In fact, rather than an attractive market from the point of view of equities, Latin America is so from the point of view of fixed income, according to Abbas Ameli-Renani, emerging markets’strategist. In contrast to their 2014-2016 commitment to Central and Eastern European markets (due to the ECB’s EQ benefits and low inflation; markets which he now considers as overvalued and risky if there is an inflationary rebound), their commitment when it comes to debt in local currency is now on Latin America. Thus, markets like Brazil are attractive, both when considering local currency debt and external debt in hard currency, along with other prominent markets such as Russia or Indonesia. He likes local debt because, in many markets (with some exceptions), inflation is lower than that forecast by central banks, which not only does not lead to rate increases, but which will cause them to be maintained or even for some authorities to adopt an accommodative bias, which is positive for local debt. The exception would be Mexico, but it is a market in which the fund manager is looking for buying opportunities, as the central bank is prepared to support the currency if necessary in the face of Trump’s threats. He does not see the same attraction in Turkey.
Nonetheless, Amundi’s strong conviction overweight is emerging market debt in hard currency, thanks to the improvement of fundamentals in those countries, and reminds us that it is an asset which offers the same return as global shares but with a quarter of its volatility.
Trump: A demon for emerging markets?
The fund manager, who believes that China may be a key risk for emerging markets, explains, however, that although the Trump effect may be seen as negative in these markets because of protectionist rhetoric and the implications of rate hikes by the Fed, it should, in fact, help the emerging world due to the implementation of US tax policy, and the country’s growth, which supports greater global growth. «Historically, when the United States has raised rates, the spreads of emerging countries have narrowed,» he points out. And if the Fed raises rates for the same reason, because there is growth, there is no impact either. “Trump will not necessarily be negative for emerging markets: only if there is a combination of strong protectionism, while at the same time the Fed raises rates very aggressively, will there be an impact, but it is unlikely that both events coincide” he added.
Ecuador appears to be in the mood for change. Lenin Moreno, anointed successor to President Rafael Correa, was predicted to win but now looks unlikely to avoid a run off in elections this weekend. The polls have been narrowing and now even more so after Moreno’s running mate Jorge Glas was implicated in the Petrobas scandal.
A poll last week by Quito-based CEDATOS gave Moreno just a 32 percent share of the vote. He would need to secure a majority of all valid votes or win over 40 percent and a 10 point difference with the closest rival.
Moreno’s threat comes from conservative candidates Guillermo Lasso and Cynthia Viteri. The CEDATOS poll gave Lasso, a banker, 21 percent share of the vote and centre-right lawyer Viteri 14 percent. Another poll is due later this week and one of them is likely to join Moreno in the second round.
Both Lasso and Viteri would be broadly welcomed by international investors. They would represent a pro-business break from the market unfriendly policies of Correa.
But the drop in oil prices has hit the country hard. Oil accounts for over half of Ecuador’s export revenue and nearly a third of government revenue. Unfortunately, the country did not use the good years of high oil prices to sufficiently diversify its economy. Industry and manufacturing are taxed heavily, companies have not invested enough and so remain uncompetitive. The state has swollen even as the private sector has failed to flourish. An inflexible labour market hinders growth.
All of this has seen the country’s external and bilateral debt to China grow again. Last year’s earthquake has compounded the effect of the decline in oil revenue. The upshot is that Analytica estimates that the economy contracted 2.5 percent in 2016 and it is predicted to decline by 1 percent this year.
One of Correa’s legacies is the establishment of a middle class which grew as oil revenues created growth. But that middle class has now grown weary of corruption, inefficiency and stagnation. The election victor will have to prescribe tough medicine to them, and the rest of the country, but who does the prescribing remains to be seen.
Column by Edwin Guttierez, Head of Emerging Market Sovereign Debt at Aberdeen Asset Management.
