A reminder today from Reuters on the perils of being a research analyst at a brokerage firm.
The guts of the story:
- JP Morgan equity strategists downgrade Indonesian stocks to underweight
- The Indonesian finance ministry takes offence and stops using JP Morgan as a primary dealer for its government bonds
- JP Morgan upgrades Indonesian stocks to neutral
- Everyone lives happily ever after
Now I’ve seen lots of cases where companies “blacklist” analysts who put a sell recommendation on the stock, not allowing them into company presentations or to dial-in to conference calls. I’ve even heard of a case where a company tried to sue an analyst for libel.
But this is a new one. Strategists are generally a little safer from conflicts of interest, but this time they weren’t. I’m guessing there were a lot of angry meetings (phone calls and emails are recorded…) between the bond desk and the equity desks discussing how much money had been lost by the bond desk because of the research.
And that is why most fund managers ignore broker recommendations completely. Don’t get me wrong, fund managers read broker research, talk to analysts and quiz them on their views. There are a lot of bright analysts with interesting insights. And you learn to read between the lines. The problem is that you never know what pressures (both within the brokerage firm and from outside) have been put on the analyst to come up with the final recommendation.
Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):