The top performing equity buy recommendations for the three year period ending March 31, 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 150 research providers for the period from April 1, 2013 through March 31, 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.
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 -24.6%. Similarly, the volatility of its buy recommendations, 35.6%, was nearly triple that of the S&P 500.
Griffin Securities, a NY-based boutique investment bank focused on growth sectors, 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
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.
Duration of Recommendations
Griffen Securities, BWS Financial, an independent research firm focused on tech and biotech stocks, and Northcoast Research, an independent research firm based in Cleveland OH, had the longest average durations for their buy recommendations, averaging ten 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 positive environment for stocks, but the last twelve months have not been. 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 Philadelphia-based Boenning & Scattergood, Inc., a mid-tier investment bank (20.4%) and FIG Partners (9.6%). Liberum Capital struggled with a -12% return.
Our Take
The recommendations from boutique investment banks did well over the last three years, reflecting a positive environment for buy recommendations. Unfortunately, more recent market performance has been challenging, and we can expect changes in the performance rankings if current market conditions continue.