The top performing equity buy recommendations for the three year period ending December 31, 2016 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 149 research providers for the period from January 1, 2014 through December 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.
FIG Partners, a boutique investment bank which tracks community banks, had the best 3 year buy performance, based on a limited number of buys. Its recommendations were accompanied by moderate levels of risk, with a maximum drawdown of -18%, the same as the maximum drawdown for the S&P 500 during the period. However, the 17.5% volatility of FIG Partners’ buy recommendations was significantly higher than the S&P’s volatility of 13.4%.
Sandler O’Neill, a NY boutique investment bank focused on the financial services sector, benefited from the post-election surge in financial stocks, garnering the second-best buy recommendation performance over the last three years. The recommendations had a higher maximum drawdown of nearly 20% and a standard deviation of 15.7%. Boenning & Scattergood, a small Philadelphia-based retail brokerage, had the third-best performance for its buy recommendations over the period.
Firms with Top Performing Buy Recommendations for the 3 year period ending December 2016
The top twelve firms had better performance for their aggregate buy recommendations than the S&P’s 8.9% return for the three years ending 2016. 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, with five boutique investment banks also showing well.
Of the top twelve performers, TheStreet.com Ratings had the best risk/return profile for its buy recommendations. Its maximum drawdown was significantly better than the S&P 500 (-13.7% vs. -18%) and the 12.6% standard deviation of its recommendations was lower than the S&P’s 13.4%.
Duration of Recommendations
Drexel Hamilton had the longest average duration for its buy recommendations, averaging nearly 11 months. In contrast, the buy recommendation duration for some of the quantitatively oriented research firms –notably Thomson Reuters/Verus and Zacks Investment Research– averaged around one 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, despite increased levels of volatility. Therefore, it is revealing to examine the 1 year returns.
The best one-year buy performance was from FIG Partners (47.5%), followed by Sandler O’Neill (30.7%).
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, Ford, TheStreet.com and EVA Dimensions—have broad coverage combined with typically shorter durations associated with their recommendations (TheStreet.com being an exception with an average holding period of nearly 8 months).
It is no surprise that boutique banks focused on the financial sector were the beneficiaries of the post-election US market euphoria driven in part by anticipated deregulation of the financial sector. Nevertheless the rising market tide has floated many boats, not just the financial sector, as the success of the broader group of firms shows.