Perspectives on the Buy-Side: How Are Decisions Made? (A National Study among US Portfolio Managers and Buy-Side Analysts) Presented by Keith Bossey Senior Vice President, Rivel Research Group NIRI Cleveland Chapter November 3, 2005
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Background on Rivel Research Group Established in 1991 One core competency marketing research A unique specialty investment community research Thousands of interviews with investment professionals every year 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 Importance of a representative sample when conducting studies among the entire buy-side universe 30 interviews... +/- 18%! 60 interviews... +/- 13%!
Study Background Research Objectives: Identify core drivers of investment decisions Clarify most valued information resources Measure the impact of investor relations Delineate opportunities for effective communications.
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%
Making the Radar Screen What if I am a small cap company? Get bigger 28% will not look at small cap companies Improve financials 23% Be visible/proactive 20% Attract sell-side coverage 11%
Making the Radar Screen Is targeting worth my time? How receptive is this group to targeting inquiries? Not Receptive: Among total managers 73% Among large cap managers 74% Among small cap managers 58% Targeting is very difficult. Rejection is constant.
Inducing Purchase or Recommendation We made it to the radar screen, what becomes important? In house research 79% SEC filings 71% Quarterly conference calls 70%
Inducing Purchase or 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%
Inducing Purchase or Recommendation Components of Management Credibility Meet/exceed goals articulated 68% Honesty/forthright/open 43% Act in best interests of shareholders 15% Articulate consistent story 9% Knowledge of the sector/business 8%
Inducing Purchase or Recommendation So, how do we communicate intangibles? Management needs to be on the road communicating...42% indicate they see management at least 3 times before purchase! Management needs to show progress against goals build credibility.
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 What else are they looking for? Tangible metrics to complete the picture. Return on invested capital 58% Revenue growth 54% Earnings per share 53%
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%
Staying in the Portfolio What are the most important elements of the quarterly conference call? Q&A period 49% Future guidance 27% Review of financials 13% Management Demeanor 6%
Staying in the Portfolio What are the red flags? Financials 65% Performance 49% Accounting irregularities/earnings quality issues 18% Financial position 12% Management 55% Poor execution against goals 19% Management changes 14% Credibility 10% Valuation Issues 28%
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% 50% 29% 22% 18% 16% 12% Often Sometimes Hardly ever Never 26% 30% 38% 34% 38% 17% 20% 18% 22% 23% 27% 18% 25% 26% 25% Requested meeting Issued Recommendation Purchased stock Recommended to colleagues Sold stock
IR is very important needs a seat at the table at all times. Targeting is VERY difficult and time-consuming. It s not all about the numbers. Management needs to be on the road talking about strategy, setting goals, meeting them and telling the truth, which leads to credibility. Covet the buy-side analyst, their role has grown immensely, key figure, importance across all aspects of decisionmaking process. De-bunking the myth that sell-side research is dead. Shift in metrics that are used to value companies, now it s who is going to invest their cash the best?
Portfolio Manager Quote: The investor relations function is a pretty easy one. It isn t any great puzzle. They have to come out and tell us what they are going to do. Then they have to actually do that. And then they have to remind us that they told us they were going to do it and most importantly that they did it. It s really easy. They need to lay it on the line.