Perspectives on the Buy-Side:How Are Decisions Made?
(A National Study among US Portfolio Managers and Buy-Side Analysts)
Gene RubinVice President
Established in 1991
One core competency – marketing research
A unique specialty – investment professionals
5000 interviews annually
Clients include half of the Fortune 100
Background on Rivel Research Group
Study Background
306 telephone interviews on the buy-side
+/- 6% margin of error on total data
213 portfolio managers
167 buy-side analysts
Totals include 74 who perform both functions equally
Other subgroup breakdowns
95 Large Institutions, 80 Medium, 131 Small
134 Northeast, 67 Midwest, 52 South, 53 West
150 Large-Cap Focus, 85 Mid-Cap, 65 Small-Cap
55 Growth, 123 GARP, 91 Value, 28 Total Return
101 Asset Management, 57 Mutual Fund, 25 Pension Fund, 24 Hedge Fund
Study Background
Research Objectives:
Identify core drivers of investment decisions
Clarify most valued information resources
Measure the impact of investor relations
Delineate communications opportunities
How Decisions Are Made
Three Steps of the Process
Making the Radar Screen
Inducing a Buy Decision or Recommendation
Staying in the Portfolio
Making the Radar Screen
How do you make it to the radar screen?
In house research – 85%
Brokerage house research – 75%
Articles in business/trade publications – 75%
Independent research – 71%
Quarterly earnings conference calls – 60%
Group presentations from corporate executives – 57%
One-on-one meetings with corporate executives – 57%
SEC filings – 54%
Annual reports – 51%
Making the Radar Screen
Large-cap investors Mid-cap investors Small-cap investors
In-house research In-house research In-house research
Business/trade articles Brokerage house research Business/trade articles
Brokerage house research Business/trade articles Brokerage house research
Independent research Independent research One-on-one meetings
Earnings conference calls Earnings conference calls Group presentations
Top five means of bringing stocks to attention by respondents’ cap-size focus
Making the Radar Screen
Top five means of bringing stocks to attention by respondents’ investment style
Growth GARP Value
Brokerage house research In-house research In-house research
In-house research Brokerage house research Business/trade articles
Business/trade articles Business/trade articles Brokerage house research
One-one meetings Independent research Independent research
Group presentations Earnings conference calls One-one meetings
Making the Radar Screen
What if I am a small cap company?
Will not look at small caps – 28%
Improve financials – 23%
Be visible/proactive – 20%
Attract sell-side coverage – 11%
Avoid appearing “complex”
Management needs to go on the road with sell-side even if they have no plans to cover the stock
*Manage internal expectations well and set realistic goals
Making the Radar Screen
Is targeting worth my time? How receptive is this group to targeting inquiries?
Total managers – 73% not receptive
Large cap managers – 74% not receptive
Small cap managers – 58% not receptive
Manage expectations because targeting is labor intensive and rejection is constant.
Inducing Purchase/Recommendation
In house research – 79%
SEC filings – 71%
Quarterly conference calls – 70%
Independent research – 68%
Brokerage house research – 66%
Annual reports – 64%
One-on-one meetings with corporate executives* – 62%
Group presentations from corporate executives – 60%
Articles in business and trade publications – 60%
We made it to the radar screen, what becomes important?
Top five means of evaluating stocks by respondents’ cap-size focus
Large-cap investors Mid-cap investors Small-cap investors
In-house research In-house research One-on-one meetings
Independent research SEC filings SEC filings
Earnings conference calls One-on-one meetings Group presentations
Brokerage house research Earnings conference calls In-house research
SEC filings Brokerage house research Earnings conference calls
Inducing Purchase/Recommendation
Top five means of evaluating stocks by respondents’ investment style
Growth GARP Value
SEC filings In-house research SEC filings
One-on-one meetings Earnings conference calls One-on-one meetings
In-house research Independent research Earnings conference calls
Earnings conference calls Brokerage house research In-house research
Brokerage house research SEC filings Group presentations
Inducing Purchase/Recommendation
Management credibility – 83%
Effective business strategy – 77%
Reliable cash flow – 72%
Attractive growth in EPS – 68%
Strong balance sheet – 61%
Economic/industry trends – 48%
Innovative products/services – 44%
Corporate governance – 42%
Strong corporate culture – 33%
Attractive dividend – 13%
Where are they focused for their in-house research? A mixture of tangible and intangible factors...
Inducing Purchase/Recommendation
Components of Management Credibility
8%
9%
43%
68%
15%
Knowledge of thesector/business
Articulate consistentstory
Act in best interests ofshareholders
Honesty/forthright/open
Meet/exceed goalsarticulated
Inducing Purchase or Recommendation
Inducing Purchase or Recommendation
Face-to-face: 42% indicate they “see” senior
executives at least 3 times before purchase!
Need to communicate a concise strategy and clearly defined
short-term and long-term goals
Need to convey well-defined metrics for investment
professionals to measure progress
Need to be honest about obstacles and what can go wrong
Need to show progress against self-established goals
So, how do we communicate intangibles?
22% BSAs and PMs chose not buy or cover a company which did not provide earnings guidance
over the past 12 months
Return on invested capital – 58%
Revenue growth – 54%
Earnings per share – 53%
Return on equity – 48%
P/E ratio – 43%
Discounted cash flow – 39%
EBITDA – 39%
Economic value added – 23%
Book value – 19%
What else are they looking for? Tangible metrics to complete the picture.
Inducing Purchase/Recommendation
Inducing Purchase or Recommendation
Who should go? Question: which of the following executives have you met prior to purchasing/recommending a stock?
CFO – 86%
CEO or President – 77%
IRO – 66%
Key Operating Executives – 36%
Inducing Purchase or Recommendation
CHALLENGE:
CEOs biggest frustrations with the investment community:
43% - too short-term oriented*
34% - lack sufficient knowledge about company*
21% - too many companies for analysts to cover well*
*Data from Rivel’s 2006 “Perspectives from the CEO” study
CEO’s spend 12% of their time communicating with the investment community*
They do not want to spend more*
Inducing Purchase or Recommendation
Time Spent with Investment Community is:
Adequate 85% Adequate 85%
More than adequate 7% More than adequate 7%
Inadequate 8% Inadequate 8% *Data from Rivel’s 2006 “Perspectives from the CEO” study
What Role Does Investor Relations Play?
Question: As a result of interaction you have had with investor relations officers how frequently has the following occurred?
26% 25%
17%20%
18%22% 23%
26%
34% 38%
29% 22%18% 16% 12%
28%27% 25%
30%
38%
Requested meeting
Issued Recommendation
Purchased stock
Recommended to colleagues
Sold stock
Often
Sometimes
Hardly ever
Never
56% 50%
Staying in the Portfolio
Quarterly conference call – 79%
In house research – 79%
SEC filings – 73%
Brokerage house research - 69%
Independent research – 66%
One-on-one meetings with corporate executives – 63%
Annual reports – 63%
Articles in business and trade publications – 63%
Group presentations from corporate executives – 58%
Corporate websites 52%
What communications are important? Question: What types of communications are most helpful after stock purchase?
You made it into the portfolio – Now what?
Staying in the Portfolio
Top five means of monitoring performance after purchase/recommending a stock by respondents’ cap-size focus
Large-cap investors Mid-cap investors Small-cap investors
In-house research Earnings conference calls Earnings conference calls
Earnings conference calls SEC filings One-on-one meetings
Brokerage house research In-house research Group presentations
Independent research One-on-one meetings SEC filings
Business/trade articles Brokerage house research In-house research
Staying in the Portfolio
Top five means of monitoring performance after purchase/recommending a stock by respondents’ investment style
Growth GARP Value
Earnings conference calls In-house research Earnings conference calls
SEC filings Earnings conference calls SEC filings
In-house research Brokerage house research One-on-one meetings
One-on-one meetings Independent research In-house research
Brokerage house research SEC filings Presentations/annual reports
Staying in the Portfolio
34% – Once (33% PMs: 40% BSAs)
30% – Never (38% PMs: 18% BSAs)
15% – Twice
14% – Three(+)
If they own or recommend our stock, how often do they need to see management (yr)?
Covet the buy-side analyst, their role has grown immensely, key figure, importance across all aspects of decision-making process.
Sell-side research remains a central source for (especially):
Getting on the buy-side radar screens
Monitoring the stock while it is in a portfolio
Targeting-going directly to the buy-side to generate interest without true management commitment and proper resource allocation will likely result in a waste of time. Must manage expectations.
It’s not all about the numbers. Management needs to be on the road (often) talking about strategy, setting goals, meeting them and telling the truth, which leads to credibility.
Shift in metrics that are used to value companies, now it’s “who is going to invest their cash the best?”
IR affects investment decisions-needs a seat at the table at all times.