AJ Bell: Analysts failed to add value in 2016

Data-Corporate-Finance-Business-Pen-Graph-Growth-700x450.jpgAnalysts’ stock picks failed to deliver in 2016, research by AJ Bell suggests.

The platform provider looked at companies in the FTSE 350, excluding investment trusts, and the corresponding analyst recommendations at the start of 2016 and assessed how they played out throughout the year. The firm says: “The results make for sombre reading for those investment banks and brokerages looking to justify hefty fees for access to their analysis.”

AJ Bell highlights the need for fund managers to consider the value added by broker research, given the costs and the industry’s current drive towards fee transparency. The FCA estimates retail investors paid £1.5bn in annual charges in 2012.

The 10 most popular stocks, recommended by analysts across the board, returned an average of 2.1 per cent in capital compared to the 12.5 per cent increase in the FTSE 350, while the 10 least popular stocks returned an average of 56.2 per cent over the year.

Russ Mould, AJ Bell investment director, says: “Looking at the bare data cynics would say the analyst research has little or no value at all – other than perhaps giving a steer that investors should do the opposite – and it is unlikely that the broking industry will be able to sustain an average of 13 analyst ratings per stock over the medium term, given the costs involved.

“From a retail investor’s perspective, this shows the importance of doing your own research and not blindly relying on the consensus views of the ‘experts’. If you don’t understand the business, aren’t sure the company has pricing power, don’t trust the management or fear the shares are expensive, you may need to think again.”

In January 2016 analysts made 470 sell recommendations compared to 1,939 buy recommendations.

Mould adds: “The 2016 figures raise the question of which stocks had the highest percentage of ‘buy’ and ‘sell’ ratings as we head deeper into 2017.

“January’s performance data looks more promising for the analysts, as the 10 most popular selections by percentage of buy ratings are outperforming both the FTSE 350 and the 10 stocks with the greatest percentage of ‘sell’ ratings.”