Investec’s mea culpa
Perhaps the least serious thing about Investec’s apology for an analyst’s opinions is the public-relations own goal scored by one of the country’s biggest banks and household brands. It was an ill-advised intervention that did the bank no favours. But there is a bigger principle at stake.
By apologising to Tongaat Hulett CEO Peter Staude for a report in which one of its analysts suggested the long-serving leader of the country’s biggest sugar producer should resign over what he said was an “appalling” set of financial results, Investec has brought attention to a longstanding issue that has dogged investment banks since the aftermath of the burst in the tech bubble.
It is important to get back to basics and understand the role of analysts. In theory, they are supposed to scrutinise companies with absolute objectivity to ensure that the investors who rely on their opinions can make informed decisions. This is not merely an academic exercise. The fund managers, pension funds and others who rely on analysts’ opinions are responsible for managing the wealth of workers across the country.
While they are employed by banks and brokerages that often have commercial interests with the companies that they analyse, there will always be a degree of scepticism about the advice they dish out. Events from the bursting of the tech bubble in the early 2000s to the global financial crisis, which broke out about a decade ago, have served to highlight potential conflicts that may stand in the way of independent analysis.
As far back as 2001, the US Securities and Exchange Commission highlighted a survey that showed 99% of brokerage house analysts’ recommendations were for investors to either buy or hold the shares they were examining. It also found that while the Nasdaq was busy sliding 60% in 2000, less than 1% of analyst recommendations were sell or strong sell.
One of the UK’s largest asset managers released survey findings in 2017 that equity analysts were often reluctant to criticise the companies that they covered. Among the more startling findings in the Aviva Investors report was that about 90% of analysts said they took “some additional caution” when confronting subjects that were commercially sensitive to their own bank.
One of the most notorious cases at the turn of the century involved Merrill Lynch, then the biggest brokerage in the US. It eventually settled in 2002, agreeing to pay $100m without admitting wrongdoing, after it was accused of giving favourable ratings to companies that used its other services, such as the selling of shares and bonds.
That period prompted much soul searching across Wall Street and brought to the forefront the issue of how analysts were rewarded. It is an issue that has come up again with recent reforms in Europe. One of the major changes is that brokerages are required to charge directly for analysis, unbundling it from other services that they get from banks.
The idea is to ensure that asset managers and others put their clients’ best interests at the forefront when choosing brokerages for services such as execution, rather than being induced by the offer of free research. This, of course, has raised questions about the true cost of the research and there has already been a cull of positions across investment banks as asset managers and other clients become more choosy about whose research they access.
In this environment, it is even more crucial for analysts to justify their existence, and it is not going to be easy if their objectivity can be questioned.
It is in this context that Investec’s apology to Staude is highly problematic. The mea culpa did not come because the analyst made factual or other errors in his report. It was all to do with possible embarrassment for Staude.
As if that was not bad enough, the bank also felt the need to add that it has had “a long and fruitful relationship” with the CEO. It would seem the problem with this is pretty obvious.
THE APOLOGY WAS ALL TO DO WITH POSSIBLE EMBARRASSMENT FOR STAUDE