The top performing equity buy recommendations for the three year period ending June 30, 2016 came from London-based investment bank Liberum Capital, according to performance information collected by Investars, a research performance measurement and commission management systems provider.
Investars collected performance data on 147 research providers for the period from July 1, 2013 through June 30, 2016 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.
Liberum Capital, a boutique investment bank founded by ex-Collins Stewart professionals, had the best 3 year buy performance, based on a limited number of buys and sells. Its recommendations were accompanied by very high levels of risk, with a large maximum drawdown of -21.7%. Similarly, the volatility of its buy recommendations, 33.5%, was over double that of the S&P 500.
Boenning & Scattergood, a small Philadelphia-based retail brokerage, had the second best performance for its buy recommendations. FIG Partners, a boutique investment bank which tracks community banks, had the third best record of the firms tracked by Investars.
Firms with Top Performing Buy Recommendations for the 3 year period ending December 2015
Six of the top ten firms are independent research firms, with four small investment banks also showing well.
Of the top ten performers, Thomson Reuters/Verus, a collaboration between Verus Analytics and Thomson Reuters, had the best risk/return profile for its buy recommendations. Its risk metrics were less than the S&P 500 while its performance of its recommendations exceeded the benchmark.
Duration of Recommendations
Leerink Partners, a healthcare-oriented investment bank, Northcoast Research, an independent research firm based in Cleveland OH, and Griffen Securities, a NY-based boutique investment bank focused on growth sectors, had the longest average durations for their buy recommendations, averaging ten months or more. In contrast, the buy recommendation duration for the quantitatively oriented research firms –Thomson Reuters/Verus, Zacks Investment Research and Morningstar– averaged around one month.
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, but the last twelve months have been erratic. Beginning in the second half of 2015 markets have experienced higher levels of volatility and lower returns. Therefore, it is revealing to examine the 1 year returns.
The best one-year buy performance was from Boenning & Scattergood, Inc (20.6%). Leerink Partners struggled with a -21.9% return.
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—have broad coverage combined with short durations associated with their recommendations. Morningstar’s stock ratings are a mix of analytic and quantitative.
The top ten firms had better performance for their aggregate buy recommendations than the S&P for the three years ending June 30th. However, half the firms had negative returns over the latest twelve months prior to June 30th (along with the S&P 500) highlighting the recent challenges in the market environment, and the difficulty in maintaining a positive track record.