The debate over how to efficiently distribute price sensitive information will run for months to come
The impact of Merrill Lynch's roasting by New York attorney general Elliot Spitz is seeping quickly through the investment industry, both in the US and in London. All is calm on the surface, but underneath investment banks are paddling furiously to re-position themselves for what everyone understands is a new era.
Given its usual resilience to challenge, Merrill's acceptance of the $100m fine and the package of reforms demanded is as public an admission as a non-admission of culpability gets these days. Forget for one moment the consequences for the Thundering Herd, now corralled and awaiting trucking to the knacker's yard. Analysts' Holy Trinity has been dismembered: no longer will price targets, forecast earnings and recommendations reinforce each other in the simple but sublime system where unpleasant or unwelcome facts were airbrushed out of the calculations.
A survey by Greenwich Associates of nearly 300 asset managers in the US shows that already, the quest is on for more independent equity research. Fund management firms are seeking independent providers, and they are channeling more business to brokers with low or no conflict of interest. That is not to say established relationships will be severed. They will just wither away.
Analysts used to be the also-rans, those destined to remain in the slave pool unless a glint of merit saw them plucked from obscurity to face greedy investors emboldened by the bull market, and the voracious appetite of the financial media. Have analysts been discredited by recent events? Not a bit of it. The market for their services has never been more buoyant.
Momentum investing, where investors latch onto the coat-tails of a stock enjoying consistent upgrades, is an established technique. But in the new age, managers will essentially have to choose between independent or in-house research. Many are plumping for the latter. Where cutbacks are savaging other departments, research is escaping relatively unscathed. New pay deals are higher, but targets are linked to the gap between the analyst's target price for each stock and its current price, or the outperforms vs the underperforms.
Which all suggests that Mr Spitzer was right to make a fuss: the industry has responded properly and investors are better off as a result. Now the system is being reformed, recommendations will have little power to move share prices? Wrong. Ask Eastman Kodak, hit recently after Salomon Smith Barney cut its rating. Cablevision Systems happily rose as JP Morgan gave an upbeat view, and Ford Motor positively leapt after a Merrills' upgrade.
This story has some way to run yet. Investors, investment managers and regulators are still looking for an efficient way to distribute price sensitive information fairly. Its value is rising, partly because in a turning market, past trends are of little use. So quite a few investment houses are testing some distinctly alternative methods of collecting raw information.
At the retail end of the market, the enduring variable in the equation is the investor. As markets and regulations get more complex, even the most dedicated punter is tempted to accept the professionals view at face value. Why keep a dog and bark yourself? Until investors are trained to assess the information provided to them, as well as what is not, plugging a hole at one point in the investment process just builds up pressure somewhere else.
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