The top performing equity buy recommendations for the three year period ending December 31, 2015 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 154 research providers for the period from January 1, 2012 through December 31, 2015 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.
Top Performers
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 -34.7%, nearly triple that of the S&P 500. Similarly, the volatility of its buy recommendations, 36.5%, was on the extreme side.
Leerink Partners, a healthcare-oriented investment bank, had the second best performance for its buy recommendations, partly reflecting strength in the life sciences sector. 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
Risk
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.
FIG Partners and Thomson Reuters/Verus had the lowest maximum drawdowns, a measure of the largest percentage loss the recommended stocks would have experienced during the 3 year time horizon. FIG Partners had a maximum drawdown of -9.2% and Thomson Reuters/Verus -12.1%, both below the maximum drawdown for the S&P 500.
The standard deviation of returns associated with the recommendations, a measure of their variability, were lowest for Thomson Reuters/Verus and Zacks Investment Research, a retail-oriented independent research firm.
Duration of Recommendations
Leerink, GARP Research, an independent research firm tracking US mid-cap and small-cap stocks, and Griffin Securities, a NY-based investment banking boutique, had the longest average durations for their buy recommendations, averaging eleven months. In contrast, the buy recommendation duration for the quantitatively oriented research firms –Thomson Reuters/Verus and Zacks– 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 benign environment for stocks, with markets generally rising over the period. 2015 was not as benign, with higher levels of volatility and lower returns. The S&P 500 eked out a 1.4% return only after dividends were added back. Therefore, it is revealing to examine the 1 year returns.
The best one-year buy performance was from Griffin Securities (18.6%) and FIG Partners (15.7%). BWS Financial, an independent research firm, struggled with a -8.4% return, as did Liberum Capital (-5.1%).
Our Take
The recommendations from boutique investment banks did well over the last three years, reflecting a positive environment for buy recommendations. Also, the sector specialization of firms like Leerink Partners and FIG Partners benefited from strong sector performance. Unfortunately, 2016 may be a year when sell recommendations become as important as buy recommendations.