Wednesday, 5 November 2008

Fundamentals and valuations – post script

(By Anthony Miller) Besides prompting my comment last weekend (see here), the recent FT Lex column on equity research provoked an incisive retort from my friend and ex-colleague, Richard Kramer. Richard is founding managing partner at Arete Research, where I previously did four years’ penance for my innumerable sins. Arete can be likened to the equity research ‘twin’ of TechMarketView, as they always call it as they see it, without fear or favour. With that in mind, Richard’s letter to the FT speaks for itself …

“As the founder of the UK's first independent research provider in 2000, I think (the) Lex column on equity research (Analysis Paralysis, 3 Nov.) missed the most important and obvious point: Investment banks have absolutely no interest in doing the kind of enlightening, long-term deep fundamental analysis that many expect from equity research. Before Spitzer, research was primarily "marketing ", designed to win banking clients for IPO or raising capital. Post-Spitzer, research sought to generate flow for the banks’ new found profit centre: proprietary trading desks. This explains the frequent changes of recommendation and minute tweaks of earnings estimates: these have the common aim of generating "noise" in the market and hence, increasing volatility. No doubt many tech company managements have been befuddled by the violent swings in share prices, and "reactions" to what otherwise would be miniscule alterations to analysts' expectations. Now, in a world of scarce credit, banks will have find a new source other than bankers’ deal fees or proprietary trading income to cross-subsidise their "research" departments. But one would be sorely mistaken in thinking banks have an interest in educating their clients via research: this would remove the information asymmetries trading desks and bankers seek to exploit. Investors will surely need research in the "giant re-equitisation" you expect. Yet if the past decade taught us anything, it would be foolish or negligent to expect independent thinking to come from still-conflicted banks."

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