Blunt though this observation may be, it succinctly captures a topical issue which the City's regulators continue to grapple with: the way that research is paid for. The problem is certainly not that analysts are fundamentally dishonest - in my slightly biased opinion they're probably the most hard working and trustworthy bunch in the City. But their work has frequently been clouded by the commercial constraints of the industry they work within.
With the old model that I worked under more than a decade ago, fund managers did not directly pay for research, but would instead 'pay' in the form of commissions on trades placed with a broker. Research was also unofficially used to support corporate finance relationships. House analysts would be required to cover the shares to which we acted as house broker, and bearish tomes were rarely the result. My period as an analyst coincided with the market's post dot-com collapse so flotations were thin on the ground, but research was (and still is) regularly used to support new issues. Again, the coverage of so-called 'on-side' analysts rarely paints anything other than a glowing picture - and any independent wanting to kick the tyres might struggle to gain the access to management needed to produce meaningful analysis.
In short, bulls win business while being a bear, as former analyst Phil Oakley wrote on ShareScope's blog this week, "can be a very lonely place" that could cost you your job. Indeed, because research didn't generate revenue directly it was perceived as a cost centre at the behest of the sales traders and rainmakers in the corporate finance department - in other words, do as you're told. So, in my view, the ongoing separation of payments for trading activities and research, which will be thrown further into focus when new Mifid II regulations come into force in 2017, should deliver a much more 'honest' appraisal of companies' prospects. It's already started to happen, with more and more independents springing up and more fund managers willing to pay for genuinely thought-provoking insights unsullied by conflicts of interest.
None of this is to suggest that research, even in its current somewhat conflicted form, isn't useful. While we at the IC tend to pay scant attention to actual recommendations, we still pore over research to glean useful ideas from smart people who get to spend more time talking to management than anyone else. And without their earnings forecasts we'd by shooting in the dark when it comes to valuations - their predictions aren't always right, but they're the best we've got. The trick, as Mr Oakley wisely points out, is working out how wrong they are.
