What price analysis?

The guessing game continues as to when the Federal Reserve will start to taper. Ahead of the meeting yesterday, I wrote that expectations had drifted out from December this year to as far as April 2014. Last night's statement has been dissected overnight by economists looking for changes in phraseology from the last statement, trying to find any hints what the Fed might do next. I still believe that the Fed will wait until the New Year and decide what policy action to take then. Why risk in the last weeks of the year a negative reaction to asset prices possibly undoing a lot of the progress in the year? I am sure they would not want 2014 starting on a low note, but what do I know, like everyone else, I am guessing. Unsurprisingly there was some profit taking last night after the statement as traders locked in some gains of the past few weeks.

Interesting article on the front page of yesterday's Financial Times with regard to costs passed on by asset managers to their clients. Investment banks have seen their margins consistently being eroded over the past few years; competition and the development of technology being the main reasons. Investment managers have so far been fairly immune, up until now their fees have remained largely unchanged. That era looks like it is coming to an end, as clients are becoming more aware how costs impact returns and the growth in exchange traded funds.

Two areas of concern are the way asset manager's pass on the cost of research to their clients and rewarding brokers for access to corporations. Analysts have traditionally been one of the higher paid areas in banking. The reason for this is, not only do they offer opinion to clients, but are required internally to assist all areas of the firm from the traders, sales and corporate finance. Analysts are required to compile the information a company provides, scrutinise it and come to conclusions and recommendations. Analysts are considered to be an essential part of maintaining efficient capital markets. The real value an analyst offers is a subject that could be debated for many a long hour. Having worked with research departments for over 25 years, the truth is I can only remember a limited number of analysts who added real and innovative thinking.

To my mind one of the issues these days is that because analysts are often dragged in many directions they do not have the time to delve into a company and really understand what is impacting its performance. You have the other problem for analysts when they do try and understand more what the CEO is looking to do with the business. CEOs are wary of breaking compliance rules, understandably so, therefore despite companies offering many more public statements, they are less prepared to give meaningful insights on an individual basis. Analysts need more time to do their own research but due to other demands do not necessarily have that time.

I realise analysts are an essential part of capital markets, but I think investment managers have become overly dependent on them when making decisions about where they should invest their client's capital. Reassessing what value analysts add, what investment managers are paying for and whether the client should pick up the bill in this case I think is justified.

Posted on October 31, 2013 .