If you are able to obtain examples of equity research, you and whoever has provided it to you will often, in fact, have been in breach of FCA regulations. Dig into the often lengthy disclaimers, and you’ll find clauses that specifically prohibit dissemination to retail investors. It’s a shame, because it can be an invaluable resource.
You can, of course, pick up recommendations, price targets and high-level forecasts from various data aggregators. That’s somewhat useful, but these figures would be more useful still within the context of an analyst’s assumptions behind the inputs into their financial model’s forecasts and price targets. A price target - or even just a simple ‘buy’ recommendation - means very little if we don't know the way in which it was reached; garbage in, garbage out is very much a factor in financial modelling. Nor does it highlight any perceived risks – even a simple bull and bear case, like the ones we publish alongside our weekly tips, would be a vast improvement.
Given that there are some issuer-sponsored equity research firms and retail-friendly brokers such as Killik and Charles Stanley that do make their research more widely available, it would be harsh to entirely blame the FCA for enforcing regulation designed to protect investors, but actually working out to their detriment. Even though I have heard it said that the rules exist because retail investors aren’t sophisticated enough to understand the subtleties of analysts research, I don’t agree with that - and surely an information vacuum is hardly better protection. It’s more likely that banks and brokers don't want to give it to anyone except their fund manager clients, a source of valuable dealing commissions.
It's another example of the information asymmetry between retail and institutional investors that I spoke of recently, and one reason why some in the industry are reaching the conclusion that the equity research model isn't working properly. Not so much the research itself, of course - most analysts I know are extremely knowledgeable and diligent, even if occasionally hamstrung by indirect duties to corporate financiers - but the way it's paid for and distributed.
And then there is the perennial problem of coverage - most research is clustered around the larger companies, with their greater trading flows and corporate finance mandates, which means many smaller companies are woefully under-researched. Take Quindell, for example, the source of so much recent trouble - the Aim-traded insurance outsourcer is covered by just four analysts. Compare that to the 34 covering Diageo and it’s no surprise that the chaos surrounding the share persists.
It’s not so much an advice gap as an information gap and it needs closing.
