Four myths of the sell side
1. IR can help to provide an investment opinion
The role of an IRO is making sure a company’s message is fair, clear and not misleading, not telling analysts whether a company is a good investment.
Xavier Gunner, managing director in equity research management at HSBC, notes, ‘IR’s job is to provide access to clear financial reporting, and to ensure investors and analysts see the risks as well as opportunities. But it’s not up to them to make the judgment call on what is or what is not a good investment.’
Gunner will participate in this week’s IR Magazine Euro Leaders Think Tank, a gathering of top European IROs taking place on June 30 in London. Joining him on a panel discussing the relationship between IR and sell-side analysts will be Ulla Paajanen-Sainio, head of IR at Stora Enso, and Sébastien Martel, VP of IR at Sanofi.
2. The sell side is focused on the short term
An analyst goes to see a company in February and is told, ‘We’re terribly sorry, but we can’t talk to you because we’re in a closed period.’
‘There are good legal reasons for closed periods,’ Gunner acknowledges. ‘However, for many analysts’ investment theses, the focus is more often a 12 to 18-month timeframe. Analysts often need to get a flavor for what’s going on in the various markets that the company operates in,’ he says.
3. An analyst’s sole role is research
Looking back to the 1990s, analysts did research which was then marketed by the sales team. Today there are ‘marketing analysts’, resulting in larger research teams with more ‘firepower’. Gunner says, ‘We have larger teams with some analysts who spend a significant portion of their time marketing to institutional investors, while others who are better at deep analysis spend more of their time analyzing and writing reports.’
4. There aren’t enough analysts
Are analysts overstretched? ‘At times, yes,’ Gunner admits. Are they trying to do more with less? ‘Well, yes – that’s the nature of business.’
But despite sell-side cutbacks over the last several years, there seem to be more analysts than ever, with some large-cap stocks dealing with 50 or more. ‘There are probably too many brokers out there,’ Gunner says. ‘We’ve been saying that for a long time, but the business doesn’t seem to be consolidating very quickly.’