Aviva Investors calls for overhaul of 'biased' sell-side research


survey of 342 sell-side analysts conducted by Aviva Investors

Survey of 342 sell-side analysts conducted by Aviva Investors

Aviva Investors has proposed reforms of sell-side research practices, which it said were failing investors by being “overly positive, sometimes biased, and preoccupied with short-term financial metrics”.

The firm said poor sell-side research “contributes to a misallocation of capital and potentially rewards poor corporate practices” and that “many sell-side analysts do not apply enough scrutiny to businesses, management projections and risks”.

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A survey of 342 sell-side analysts conducted by Aviva Investors found that 42% of respondents believe sell-side research has a detrimental short-term focus, failing to consider material non-financial drivers of company performance, such as ESG factors.

Some 90% of respondents also said they would take “some additional caution” when writing on topics that were commercially sensitive to their own bank, while just 35% think sell-side research tackles controversial topics and offers negative assessments of companies when appropriate.

Chief responsible allocation officer at Aviva Investors, Steve Waygood, 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. More needs to be done to correct these failings, but they can be fixed if all participants in the investment chain work together,” he said.

Waywood called on national regulators such as the FCA to do more, adding they could “stipulate that research reports include an outlook of more than a year and a specific section on ESG, which requires analysts to demonstrate how material ESG considerations are integrated into their overall conclusions and ratings”.

He said: “Asset managers could make a huge difference if they directed research payments to brokers focused on long-term analysis that integrates sustainability matters.

“Asset owners, meanwhile, could seek transparency from their managers about the type of research they are buying.”

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Waywood said the Chartered Financial Analyst Institute should encourage its sell-side analyst members to look into these issues in greater depth and that companies should better articulate their integrated long-term strategy for value creation.

He added: “Companies must articulate their integrated long-term strategy for value creation, including the risks and opportunities presented by broader, non-financial issues. Boards should be open to alternative points of view as well, including negative perspectives by analysts.”

About the author

Mike joined Investment Week in May 2017 as an asset management correspondent, also covering the regulatory beat.

Prior to joining the team he worked at HFMWeek, covering the global hedge fund industry.

 

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