Buy Side Vs Sell Side Analysts

For those not in the industry, the terminologies may be confusing. Buy side analysts refer to the analysts working within a fund management firm, generating reports, analysis and recommendation for their own portfolio managers or strategy sessions. Sell side analysts are those at brokerages trying to generate ideas on buys and sells to clients. An example of a buy side analysts team (and its a big team) locally would be the analysts at Public Mutual. These recommendations by side analysts, made exclusively for the benefit of the fund that pays for them, are not available to anyone outside the fund. If a fund employs a good analyst, it does not want competing funds to have access to the same advice. A buy-side analyst's success or talent is gauged by the number of profitable recommendations he or she makes to the fund.

The buy-side differs from the sell-side in three main ways: they follow more stocks (30-40), they write very brief reports (generally one or two pages), and their research is only distributed to the fund's managers. Buy-side analysts can cover more stocks than sell-side analysts because they have access to all the sell-side research. They also have the opportunity to attend industry conferences, hosted by sell-side firms. During these conferences, the managements of several companies in a sector present why they are a better investment. After gathering this information, buy-side analysts summarize their case in a brief report that also contains an earnings forecast. These reports are only distributed to the fund's managers.

The sell-side provides research and conferences to the buy-side in the hopes that the buy-side will let them execute the large trades that the funds make when they act on the recommendation provided by the sell-side. Having access to the sell-side's primary research and the ability to attend industry conferences allows the buy-side analyst to follow many more stocks than a sell-side analyst. To compensate the firm for this information, the funds will buy and sell stocks with the brokerage firms that provide the best information.

You would think that a buy side analyst recommendation would perform better than a sell side because the former only has to please one client, while the latter may be "forced" to generate new ideas or do flip-flops in order to generate trades / commissions. The buy side are paid by the fund management house itself, hence just one client to please or piss off. The sell side is paid by the brokers, which means you can be praised or pilloried or pile-driven by many clients of the firm.

In a 2008 study by Boris Groysberg, Paul Healy and Craig Chapman for the CFA Institute in the Financial Analysts Journal Vol. 64, they looked at buy-side and sell-side earnings forecasts from 1997-2004. The conclusion was that buy-side analysts made more optimistic and less accurate forecasts than their counterparts on the sell-side. The performance differences appear to be partially explained by the buy-side firm's greater retential of poorly performing analysts and by differences in the performance benchmarks used to evaluate buy-side and sell-side analysts.

In a new study by professors from Harvard Business School and the University of North Carolina, they found that shares chosen by sell-seide analysts performed more than 3x better than those selected by the buy-side analysts (1997-2004 as well). The findings are a surprise because buy-side forecasters have none of the conflicts with investment banking units like the sell-side.

A probable explanation is that sell-side research is published while buy-side is not. The fact that it circulates spurs competition, comparisons, scrutiny, and maybe even get recognised when "best of awards" come around. It is also fair to assume that buy-side analysts have a much much less of a chance to be fired, retrenched or replaced than sell-side, and for that reason as well sell-side analysts make much more money.

The results were culled from over 12,000 analysts at brokerages and 340 buy-side institutions. Buy-side "buy calls" generate an annual market adjusted return of 2.3% while sell-siders generate an 8.1% return average. This would really beg the question why fund management firms would continue to fund these buy-side research? One main benefit is to cover those stocks that generally do not appear on the radar of the sell-side analysts. Sell-siders can only reasonably cover big stocks as those are the ones that generate the commissions. Buy-side may need to discover more of the smaller companies.

In my view, the sell-side analysts will always know the companies and the senior management of the companies covered better than the buy-side analysts. Now that there is a stricter and hardier Chinese wall between research / sales / investment banking, it will make sell-side research have a bit mor integrity and reliability.


p/s photos: Pevita Pearce

UMW Going For Ramunia Against Sime Darby

Sime Darby will be acquiring Ramunia for RM232m - RM46.2m in cash and the balance in new shares of Sime Darby Engineering. This basically values Ramunia shares at just RM0.35. I would not touch Ramunia shares above RM0.55, you have been warned. The deal will make Sime Darby Engineering the largest fabricator in the country. It will almost double its capacity to 107,000 tonnes, and its yard capacity will be increased from 114 acres to 284 acres. Ramunia on its own is a dying company, but its assets are interesting to a larger and more professionally managed firm. Sime Darby Engineering should be able to increase its book orders almost instantly. Impact positive for Sime Darby but it will be marginal owing to Sime Darby's size. Chance to exit Ramunia with some decent pricing, not to trade or buy and hold.

However UMW has hinted that it might make a competing bid, hence the interest has pushed Ramunia shares to nearly RM0.70. Considering the overall situation, I can only see bidding topping out at RM0.50-0.52. Hence anything above RM0.55 for Ramunia is plain silly. UMW has no problem going for Ramunia as it has a cash hoard of RM1.5bn. If UMW looks likely to be successful, then the upside will be better.

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STOP PRESS!!!

UMW has since issued a statement to deny this.

Subject : ARTICLE ENTITLED “UMW SET TO CHALLENGE SIME DARBY FOR RAMUNIA”

Announcement Details :


We refer to the above article appearing in The Malaysian Reserve on Wednesday, 6th May 2009, captioned as above, on pages 1 and 4, in particular paragraphs 1 and 3 as follows -

Paragraph 1
“UMW Holdings Bhd will be putting in a bid to acquire Ramunia Holdings Bhd to strengthen its oil and gas business, according to sources.”

Paragraph 3
““Previously, Ramunia was in discussions with UMW but the talks went cold. Now UMW is interested again and they will be submitting their offer in the next few days,” said the source.”

In response to the article, UMW wishes to state that the Company does not intend to submit any bid for the acquisition of Ramunia Holdings Berhad and has no knowledge of the talks referred to above. UMW also confirms that it is not in any form of discussion with any parties in this regard.



This announcement is dated 6th May 2009.


cc - Securities Commission
(Issues & Investment Division)
-------------------------------


p/s photos: Pevita Pearce

Obama's Total Pay Package & Benefits

What is Obama's pay package? Of course the cynical would lump in all the benefits, allowances, additional manpower linked to his position. The gross sums include:

Cash Compensation:
Salary: $400,000

Cash Subtotal: $400,000

Room and Board:
55,000 square foot mansion, in historic Washington, D.C.: @ $100/sqft: $5,500,000/yr
Personal Chef / Kitchen Staff: $300,000 / year
Other Servants / Attendants: $500,000 / year

Subtotal: $6,300,000

Discretionary Use Of Private Aircraft:
(One of 2 Boeing 747-200Bs "Air Force One"):
Annual Costs: 700 hours @ $65,000/hr: $45,500,000

Helicopter Fleet:
Annual Costs: 50 hours @ $5200/hr: $260,000

Aircraft Subtotal: $45,760,000

Other Personnel:
Personal Driver On Retainer (Defensive Tactical Driving Trained) @ $300/day $109,500
Personal Body Guards 35 @ $500/day $6,387,500
Use Of Personal Car 60 days @ $2000/day $120,000

Personnel Subtotal: $6,617,000

Annual Benefits Total: $59,077,000

Four Years of Same: $236,308,000

Pension And Related Benefits:
Present value of Pension Benefits ($200,000 per year): $2,251,556

Total Benefits: $238,559,556

Average Annual Pay Package Plus Benefits / Incidentals / Related Expenses: $59,639,889


Well, to be fair, Obama's pay package should be calculated as his pay, which stands at $400,000 a year for 4 years = $1.6m. He also has an annual pension after that of $200,000 per year, you don't want an ex-President living in poverty, do you!? All the other related and incidentals are necessary for him to do his job, hence should not be calculated as his pay package or benefits.

But as we all know ex-Presidents will make their big bucks AFTER he leaves office (with the possible exception of George W Bush, I mean, seriously, who wants to hear him talk, or read his memoirs???) - the speaking engagements and book deals will ensure an annual salary of at least $1.0m a year easy for the first 5 years after office. Currently Bill Clinton charges about $100,000 per speaking engagement (plus you have to foot all his miscellaneous costs, cigars not included).

p/s photos: Pevita Pearce

Krugman, Nobel Prize Winner, Makes Prediction

Bloomberg /SMH: The winner of the 2008 Nobel Prize for economics said the US is plunging into a ``nasty recession'' with a ``lot of suffering'' to come, even if policy makers succeed in unfreezing the credit markets. ``That's baked in,'' Princeton University professor and New York Times columnist Paul Krugman said in an interview on ``Night Talk'' with Mike Schneider to be broadcast later today on Bloomberg Television. ``There is a lot of downward momentum.'' He said a rise in the unemployment rate to 7% ``seems almost certain'' and he put the odds of an increase to 8% at ``better than even.'' The jobless rate in September stood at a five-year high of 6.1%.

Signs that the economy is falling into a recession multiplied this week with news that retail sales have fallen for three straight months, single-family housing starts hit a 26- year low and consumer confidence plunged the most on record. Krugman voiced some doubts that the steps that Treasury Secretary Henry Paulson is taking to combat the credit crisis will succeed and suggested that more might be needed. Paulson rolled out plans this week to use $US250 billion of taxpayer funds to purchase stakes in thousands of financial firms to try to halt a credit freeze that threatens to bankrupt companies and hammer the job market. ``It's not clear there's enough money,'' Krugman said.

He added that Paulson may also have to insist that the banks use the money they're receiving to make new loans if the plan is to work. ``They may need to be much more interventionist than they have been thus far,'' the Princeton professor said.

p/s photos: Pevita Pearce