Do firms have the analysts' numbers?

All too often, analysts and fund-managers are roped in by flashy presentations, rather than real talent, warns Robert Bruce

The relationship between companies and analysts has always been a fraught one, and views on how the relationship works are wildly different. Some analysts manage to stay on top of their work, and provide a genuine insight and understanding of what is going on. Others seem to skid by on the seat of their pants.

Companies always say that they put an enormous amount of work into investor relations. But often what they mean is that it is an extremely time-consuming task. And in an era of globalisation, an exhausting task such as wining and dining across continents comes into the equation.

It is worthwhile to really think through what you are trying to do with investor relations. And by that I do not mean the idea of trying to spin one part of the business, while rubbishing another. There are real fundamentals at risk.

A recent research document from the Institute of Chartered Accountants of Scotland, written by John Holland of Glasgow University, is a case in point. Its central chapter most usefully quotes extensively from the 25 anonymous companies that shared their experiences with him. Take this honest appraisal from a bank’s representative: “At present I would say the main problem with the analysts is getting their interest. This is a barrier to their understanding of the key intangibles in this business.”

Another, from an insurance company, shows vividly how close analysts come to simply sticking a dampened finger in the air to check the way the wind is blowing: “Fund managers are betting that the top management group will increase the consensus down through the middle management and through the chief executives of the strategic business units. They are betting on the qualities of top management.”

Analysts would argue that what they are doing here is simply assessing the senior management and thoughtfully thinking through whether they are likely to succeed with the chosen strategy. Some quotes from a technology company suggest that this might be true: “I think fund managers find it easy to spot top management stars because they stand out in terms of their track record and their strategy. They can pick out stars such as communicators and performers because they do stand out.” On that basis all is well. The analysts are on top of their job.

However, just four sentences later in the same testimony comes this: “They can be fooled by some top management individuals who are just good presenters. These individuals may not be very good at executing strategy. Some fund managers cannot separate these two qualities of communications skills and executive skills.” Small wonder that finance directors can find the whole process wearying and futile.

One retail company said: “In other words, [the fund managers] will miss out the intervening logic about value creation and go straight to their price-to-earning models. This is how many of these intangibles get into the share price through such valuation.”

The accusation of smoke and mirrors is regularly levelled at the analyst community. Often they are under too much pressure to produce an analysis without enough research or knowledge. But no one had suggested it was this close to farce. Certainly the testimonies in Holland’s research suggest that finance directors are finding it easier to triumph over the analysts and fund managers than they would like to let on.