Perspectives on the Buy-Side:
How Are Decisions Made?
(A National Study among US Portfolio
Managers and Buy-Side Analysts)
Gene Rubin
Vice President
Background on Rivel Research Group
Established in 1991
One core competency – marketing research
A unique specialty – investment professionals
5000 interviews annually
Clients include half of the Fortune 100
Study Background
306 telephone interviews on the buy-side
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
+/- 6% margin of error on total data
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
Top five means of bringing stocks to attention by respondents’ cap-size focus
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
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 sellside 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
We made it to the radar screen, what
becomes important?
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%
Inducing Purchase/Recommendation
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
Where are they focused for their in-house research?
A mixture of tangible and intangible factors...
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%
Inducing Purchase or Recommendation
Components of Management Credibility
Meet/exceed goals
articulated
68%
Honesty/forthright/open
43%
Act in best interests of
shareholders
Articulate consistent
story
Knowledge of the
sector/business
15%
9%
8%
Inducing Purchase or Recommendation
So, how do we communicate intangibles?
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
22% BSAs and PMs chose not buy or cover a company which did
not provide earnings guidance over the past 12 months
Inducing Purchase/Recommendation
What else are they looking for? Tangible
metrics to complete the picture.
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%
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
Inducing Purchase or Recommendation
CEO’s spend 12% of their time communicating with the
investment community*
They do not want to spend more*
Time Spent with Investment
Community is:
Adequate 85%
More than adequate 7%
*Data from Rivel’s 2006 “Perspectives from the CEO” study
Inadequate 8%
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?
56%
29%
22%
18%
17%
27%
Requested
meeting
16%
12%
Often
Sometimes
Hardly ever
Never
34%
38%
22%
23%
25%
26%
25%
Purchased
stock
Recommended
to colleagues
Sold stock
38%
26%
50%
30%
20%
28%
Issued
Recommendation
18%
Staying in the Portfolio
You made it into the portfolio – Now what?
What communications are important?
Question: What types of communications
are most helpful after stock purchase?
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%
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
If they own or recommend our stock, how
often do they need to see management (yr)?
34% – Once (33% PMs: 40% BSAs)
30% – Never (38% PMs: 18% BSAs)
15% – Twice
14% – Three(+)
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.