Aviva Investors calls for reform of broker research

ReportingAviva Investors has criticised sell-side analysts, saying their projections were often overly positive.

The fund management firm said many sell-side analysts’ scrutiny of businesses, management projections and risks was insufficient and this meant price targets and company long-term ratings prospects were often overly positive.

The firm said many analysts even agreed with the firm’s criticism, and one of its investment chiefs called for an overhaul of the system.

The fund management firm surveyed 342 sell-side analysts and found that much of the current analysis was overly positive, sometimes biased, and preoccupied with short-term financial metrics.

This contributed to a misallocation of capital and potentially rewarded poor corporate practices, Aviva said. Current practices also impaired the efficient functioning of capital markets.

Some 90% of those surveyed said they would take “some additional caution” when writing on topics that were commercially sensitive to their own bank.

Also, 42% of analysts said that sell-side research had a detrimental short-term focus. Only 35% thought that sell-side research tackled controversial topics and offered negative assessments of companies when appropriate.

Steve Waygood, chief responsible investment officer at Aviva Investors, said: “It is particularly interesting that sell-side analysts privately acknowledge many of the failings we anticipated ahead of the poll.

“While sustainability pays, the short-term nature of sell-side research undermines positive long-term policies and practices at companies that are assessed.”

The firm has called for a reform of sell-side research.

National regulators such as the UK’s Financial Conduct Authority could stipulate that research reports include an outlook of more than a year and a specific section on ESG [environmental, social, governance], said Waygood.

The firm added that asset managers could make a “huge difference” if they directed research payments to brokers that focused on long-term analysis and integrated sustainability issues.

Asset owners, meanwhile, could seek transparency from their managers about the type of research they buy.

“The Chartered Financial Analyst Institute has recently done some good work in this area. There is scope for it to help further by encouraging its sell-side analyst members to look into these issues in greater depth,” said Waygood.

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