Aviva Investors survey on sell-side research reveals biases

London-headquartered Aviva Investors has conducted a survey of 342 sell-side analysts on the influence and the quality of sell-side research as well as on the barriers and constraints to long-term broad-based research.

The study has found out that 94% of the sell-side analysts interviewed believe they have moderate to significant influence on investor behaviour while 78% feel they have moderate to significant influence on company behaviour. The percentage of sell-side analysts feeling they have no influence on company and investor behaviour amounts to 1%.

Aviva Investors’s survey highlights that mainstream sell-side analysts (non-ESG analysts) think their industry produces too much noise rather than in-depth research at 48%. Also 42% of the analysts surveyed believe that sell-side research has a detrimental short-term focus.

Another finding is that only 35% of them agree sell-side research tackles controversial topics and offers negative assessments of companies where appropriate. At the same time, 31% of the respondents say their research effectively incorporates analysis of broader financial and non-financial topics.

Answering the question “how important are the following factors in constructing an investment case?”, analysts surveyed by Aviva Investors have placed strategy (92%), quality of management (90%), valuation (88%), upcoming catalyst (81%) and capital allocation (79%) in the top five whereas environmental impact remains at the very end of the list (16%) and governance standards reached a score of 60%.

Moreover, the survey underlines that 12% of the mainstream sell-side analysts interviewed are never asked about broader, longer-term factors such as ESG criteria, while 15% are asked once a week and 74% are asked either once a month, a quarter or a year.

Biases and pressure

Aviva Investors’s study also emphasises on biases carried by sell-side research analysts. It shows that 90% of the 342 sell-side analysts surveyed would take some additional caution when writing on topics commercially sensitive to their own bank. In that, 38% of the analysts said they would exercise significant caution.

“I was never told what to write, but you know who pays the money. But the pressure has got less over the last 20 years. There was a time when bankers would call you up but this doesn’t happen anymore. The pressure is now applied through senior management and you never know what conversations are taking place behind the scenes.

The head of research needs to keep the head of sales and head of Equity Capital Markets happy. If research is preventing ECM activity then the head of research may not last that long,” said a sell-side analyst quoted in Aviva Investors’s report.

Another question of the survey was “what degree of pressure do you feel from the following groups that influences or constrains the research that you write?”, to which mainstream sell-side analysts interviewed respond sales (39%), research management (36%) and compliance (33%) as the top three answers.

Aviva Investors has concluded the results of its survey show that many sell-side analysts do not apply enough scrutiny to businesses, management projections and risks.

“As a result, price targets and ratings often present an overly positive view of a company’s long-term prospects, which impairs the efficient functioning of the capital markets,” the firm argued.

Steve Waygood, chief responsible investment officer at Aviva Investors, said: “We commissioned the study to contribute to the debate about how to embed ESG and other long-term themes into sell-side research.

“It is particularly interesting that sell-side analysts privately acknowledge many of the failings we anticipated ahead of the poll. While sustainability pays, the short- term nature of sell-side research undermines positive long-term policies and practices at companies that are assessed. More needs to be done to correct these failings, but they can be fixed if all participants in the investment chain work together.

“National regulators such as the UK’s Financial Conduct Authority could stipulate that research reports include an outlook of more than year and a specific section on ESG, which requires analysts to demonstrate how material ESG considerations are integrated into their overall conclusions and ratings. Asset managers could make a huge difference if they directed research payments to brokers focused on long-term analysis that integrates sustainability matters. Asset owners, meanwhile, could seek transparency from their managers about the type of research they are buying.

“The Chartered Financial Analyst Institute has recently done some good work in this area. There is scope for it to help further by encouraging its sell-side analyst members to look into these issues in greater depth. Finally, companies must articulate their integrated long-term strategy for value creation, including the risks and opportunities presented by broader, non-financial issues. Boards should be open to alternative points of view as well, including negative perspectives by analysts.”

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