For the first time in six years, brokers have given Canadian research a higher rating than U.S. research, possibly a result of accounting scandals in the U.S. and charges of conflict of interest against U.S. analysts.
Brokers’ ratings of their companies’ Canadian research is basically unchanged from last year’s Brokerage Report Card, at 6.7. But they rate U.S. research more than half a point lower, at 6.4.
The addition of Berkshire Securities Inc., for which ratings for both types of research were extremely low, dropped the average rankings, but didn’t alter the standings.
Excluding Berkshire, the average rating for Canadian research has risen to 7.0 from 6.8 last year and 7.3 in 2001, while the U.S. rating has dropped to 6.8 from 7.2 in 2002 and 7.8 in 2001.
It is conjecture but the drop in U.S. ratings may reflect advisors’ enduring distrust of analysts and their motives, taken up a notch by accounting scandals and concerns about analysts touting stocks in which their companies have an interest.
Yet most companies are working to improve research. The two most innovative moves come from National Bank Financial Inc. and RBC Investments. NBF came in third in both Canadian and U.S. research, while RBC has lost ground the past few years — particularly on U.S. research. Its ninth-place ranking is just 6.1 vs 8.0 to 8.4 in 1998-2001. It also has a 6.1 for Canadian research, down from 7.8 in 1998, leaving it in 11th place.
NBF has changed analysts’ compensation; part now depends on evaluation by the firm’s individual investor services capital markets group, which looks at “quality of the analyst’s ‘calls,’ his or her availability for retail via conference calls and other venues, and the volume and usefulness of his or her output,” says Richard Lupien, national sales manager of Montreal-based NBF.
RBC Investments has set up an “entire division actively focused on buy-side research,” says Lorne Harper, head of the advisor side at RBC Dominion Securities Inc. in Toronto. The “concentrated portfolio group” gathers research from “all research providers,” makes its own judgments and recommends a list of investments. There is no bias in favour of RBC Investments research. “The team takes all the research and applies its own judgment from the retail investor’s point of view,” he says.
Berkshire is also tackling its low marks. Tim Evans was named Berkshire’s associate vice president of research this year and is the first to hold the position. “Research was non-existent until recently,” says Geoffrey Charlton, the firm’s senior vice president of national sales. “[A new department will] help advisors … come up with solid recommendations on a buy/hold/sell basis.”
First Associates Investments Inc. has also hired a new head, Michael Binette, who most recently worked for TD Securities Inc., as part of a “significant upgrade,” says COO and deputy chairman Bill Fulton. “We went from Yorkton’s to First Associates’ research.
It’s not strong yet, but we’re building on that.” He also notes that many IAs are new and don’t know the analysts yet: “Less familiarity has probably given us the lower ranking. I hope next year it will be dramatically higher.”
Canaccord Capital Corp. — which takes second place in Canadian research in 2003 — also has a relatively new head of research: Mark Maybank, executive vice president and director of research, was hired 1.5 years ago. “He’s done a bang-up job. He’s very receptive to retail interests,” says Bob Larose, national sales manager and executive vice president. Analysts are doing more and more road shows with brokers, who can also talk to them directly.
Canaccord and CIBC Wood Gundy — tied for seventh place for Canadian research and for fourth for U.S. — are both hiring income trust analysts. CIBC also recently introduced coverage of exchange-traded funds and flow-through share tax-assisted limited partnerships. In the past year, mutual fund analysis has been distilled into core funds and performance series reports.
Dundee Securities Corp. — which rates a fourth in both Canadian and U.S. research — has added a dedicated mutual fund advisor who will produce a recommended list and a recommended portfolio, similar to what it does on the fixed-income side. It plans to do the same for Canadian equities but there is no rollout date, says CEO Don Charter. Since most Dundee IAs use managed products, the firm doesn’t cover all sectors in equities and has no plans to do so, providing instead third-party research to fill the gap.