The top performing equity research buy recommendations for the three year period ending March 30, 2018 came from boutique investment bank FIG Partners, according to performance information collected by Investars, a research performance measurement and commission management systems provider.
Investars collected performance data on 141 research providers for the period from April 1, 2015 through March 30, 2018 on which we have based our analysis. Investars calculates buy recommendation performance by tracking the buy recommendations as if an investor had invested equal amounts of cash into each stock in the research firm’s buy portfolio. A buy remains a buy until changed to a hold or a sell.
FIG Partners, a boutique investment bank which tracks community banks, had the best 3 year buy performance, despite having a modest one-year track record. Its recommendations were accompanied by moderate to high levels of risk, with a maximum drawdown of -10.1%, only slightly more than the -9.9% maximum drawdown for the S&P 500 during the period. However, the 19.1% standard deviation of FIG Partners’ buy recommendations was significantly higher than the S&P’s docile volatility of 11%.
Quantitative Research Group, an independent research firm which traces its roots from Drexel Burnham’s DAIS Group, had the second-best track record for the buy recommendations generated by its Large Cap model. Unlike most investment banks, firm’s sell recommendations nearly balanced its buy recommendations. Similar to other quant-driven research, the average duration of the recommendations was shorter than most fundamental research, averaging a little over a month.
Sandler O’Neill, a NY boutique investment bank focused on the financial services sector, had the third-best buy recommendation performance over the last three years. The recommendations had a relatively low maximum drawdown of -9.6% but a higher than average volatility measure of 16.3%. Keefe Bruyette & Woods, an affiliate of Stifel Financial also focused on the financial sector, had the fourth-best record for buy recommendations.
The top twelve firms had better performance for their aggregate buy recommendations than the S&P’s 10.8% return for the three years ending 3-30-18. However, it is important to remember that the performance analysis does not include transaction costs.
Seven of the top twelve firms are independent research firms (including institutional brokerage firm FBN Securities) while five are boutique investment banks.
Of the top twelve performers, independent quantitative researcher Trading Central, which primarily offers technical analysis, had the lowest volatility for its buy recommendations (11.2%), followed by Ford Equity Research (12.3%). Trading Central also had the lowest maximum drawdown (-7.9% which bested the S&P 500’s -7.9%). Ford Equity Research had the second lowest drawdown of -8.6%.
Duration of Buy Recommendations
Needham & Company, a NY investment banking boutique focused on growth sectors, had the longest average duration for its buy recommendations, averaging over 10 months for each recommendation. In contrast, the buy recommendation duration for some of the quantitatively oriented research firms –notably Thomson Reuters/Verus– averaged less than a month. The average for the Investars universe was close to 9 months.
The longer the holding period, the more likely the firm’s performance can be captured by investors following its recommendations. Also, longer holding periods represent lower trading costs. On the other hand, model-driven recommendations are typically updated as soon as new information is available, making the recommendations as fresh as possible.
One Year Returns
The last three years have been a generally positive environment for stocks, and the last twelve months even more so. Therefore, it is revealing to examine the 1 year returns.
Quantitative Research Group’s Large Cap Model had the best 1-year return at 39.9%, followed by FBN Securities (34.6%).
Number of Buy Recommendations
The number of buys and sells distinguish the model-driven research firms from the boutiques. The quantitatively oriented firms—Thomson Reuters/Verus, Zacks, and Ford Equity Research—have broad coverage combined with typically shorter durations associated with their recommendations.
Atlanta-based FIG Partners has topped the buy recommendation scorecard for the last seven quarters. The community-bank specialist’s 1-year track record has become more moderate perhaps suggesting that its run may be faltering as the Trump administration struggles to make good on its promises to reduce financial regulation. Nevertheless, as the buy recommendation track records attest, the last three years have been positive for financial specialists such as FIG Partners, Sandler O’Neill and Keefe Bruyette.