Boutiques focused on the financial sector continue to benefit from its robust market performance. The top performing equity research buy recommendations for the three year period ending June 30, 2017 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 140 research providers for the period from July 1, 2014 through June 30, 2017 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 -17.9%, the same as the maximum drawdown for the S&P 500 during the period. However, the 18.2% standard deviation of FIG Partners’ buy recommendations was significantly higher than the S&P’s volatility of 12.9%.
Equity Research Firms with Top Performing Buy Recommendations for the 3 year period ending June 30th 2017
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 19% and a standard deviation of 15.7%. Keefe Bruyette & Woods, an affiliate of Stifel Financial also focused on the financial sector, had the third-best record for buy recommendations.
The top twelve firms had better performance for their aggregate buy recommendations than the S&P’s 9.6% return for the three years ending 6/30/17. However, it is important to remember that the performance analysis does not include transaction costs.
Seven of the top twelve firms are boutique investment banks, and five are independent research firms.
Of the top twelve performers, independent quantitative researcher 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 12.1% standard deviation of its recommendations was lower than the S&P’s 12.9%. Thomson Reuters/Verus, another independent quantitative research group, had the second best risk profile.
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 and Zacks Investment– 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. Therefore, it is revealing to examine the 1 year returns.
All the boutiques specializing in the financial sector sported strong 1-year returns. The best one-year buy performance was from Keefe Bruyette & Woods (41.9%), followed by Sandler O’Neill (40.1%).
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 TheStreet.com—have broad coverage combined with typically shorter durations associated with their recommendations (TheStreet.com being an exception with an average holding period of over 8 months).
This is the fourth consecutive quarter that Atlanta-based FIG Partners has topped the buy recommendation list. The community-bank specialist’s recommendations continue to show strong 1-year returns, suggesting that its performance track record is enduring. Nevertheless, as the new Trump administration struggles to make good on its promises to reform financial regulation, market enthusiasm for the financial sector may cool, dampening the performance of financial specialists such as FIG Partners, Sandler O’Neill and Keefe Bruyette and Woods.