The European brokerage arena is hotly contested by the biggest names in global investing. So how does one of the relative Davids in the field consistently out-research these Goliaths?
“I’m beginning to believe that it’s not actually luck,” said Will Wallis, head of research at Numis Securities Ltd., a London-based boutique investment house that has built its name on small-to-mid-cap British stocks.
Numis barely makes it onto the list of the 25 biggest European equity research departments in terms of the number of companies it follows, sitting 24th with 329 stocks on its coverage list – less than half of the number tracked by the likes of UBS, Goldman Sachs and Deutsche Bank. Yet Numis sits atop market analytics service StarMine Corp.’s rankings of those 25 firms, based on the 12-month returns generated by the stock recommendations of its analysts. Numis also ranks second in performance over the past 24 months, and a close fourth over 36 months – a pretty good track record over what has been a trying time in European equity investing.
Mr. Wallis said his approach is simply to hire good people – and then stay out of their way.
“We don’t have me, or a strategist, having a top-down view into which everyone has to shoehorn themselves,” he said. “It’s getting analysts who have known their sectors for long periods of time, who get to know the companies very closely – and allowing them to do their jobs.”
StarMine’s data bears this out. The company ranks third in Europe in the percentage of its analysts with four- or five-star performance ratings (five is the highest score), with 36 per cent.
“I suspect this is a sign that skillful hiring, training, and mentoring is an emphasis at the firm,” said Tim Gaumer, director of fundamental research at Thomson Reuters, which owns StarMine. “The firm’s consistency suggests they have identified analysts with a persistent skill for stock picking.”
StarMine ranks brokerage firms using a proprietary scoring system called the coverage adjusted score (CAS) – which assesses the performance of each of the firm’s stock recommendations relative to the overall results for all the stocks in each sector, then adjusts the results to compensate for differences in the stocks actually covered by each firm. In this case, the system compared each stock’s performance over a local benchmark – the same sector in the same country of origin – so that country-by-country differences in overall sectoral performance are removed from the equation. (For example, the British companies that Numis tracks are benchmarked against their British peers, rather than against stocks from other parts of Europe that haven’t fared as well as the British market.)
From this, StarMine generates a score that, essentially, represents a standard-deviation degree by which each firm’s stock picks have, collectively, outperformed or underperformed the overall market. (Positive scores are outperformance, negative scores underperformance.) Numis’s coverage-adjusted score for the past 12 months is 3.39 – well ahead of second-place Swiss heavyweight UBS, at 2.56.
“Our broker rankings methodology is intended to rank brokers, not to measure performance directly,” Mr. Gaumer said. “A positive CAS score indicates that a broker has added value, and the magnitude of that score can be thought of as the evidence/validation of this; it is a measure of confidence that the added value was due to ability and not chance.”
Mr. Wallis said one of the hallmarks of Numis’s research is developing a strong understanding of, and relationship with, the companies it covers – something he believes is easier to achieve with mid- and small-cap stocks.
“[The analysts]are getting the sort of ground-up input that you get from a smaller business, that you perhaps struggle to get from a large company where you’re held at bay by investor relations, and the CEOs and CFOs are fairly remote.”
While Britain has been somewhat sheltered from the worst of the economic and debt troubles plaguing continental Europe, Mr. Wallis noted that the efforts by the British government to reign in its own deficits earlier than many of its developed-world counterparts means the domestic market faces its own headwinds to growth – particularly in the consumer sector and any business tied to government spending.
As a result, he said, the most attractive stock opportunities increasingly lie with companies with an international flavour – especially those with exposure to the big emerging markets such as the BRIC economies (Brazil, Russia, India and China).
“We have been looking, generally, for those global winners, rather than companies that have perhaps got stuck in an area of regional maturity,” he said. “The challenge for an analyst is to really try to understand the underlying drivers behind particular businesses.”
“Part of an analyst’s role in looking at companies serving the European market is to understand where their exposures are – so that in what-if scenarios, we can understand what might happen. It’s going to be very different having a bit of your business in Germany than it might be having a bit of your business in Ireland or Portugal,” he said.
He identified oil services, technology and engineering as key segments of the British stock market that offer good exposure to emerging markets. On the other hand, the domestic retail sector is out of favour, amid a deteriorating economic outlook.
“Analysts are looking for evidence as to whether companies that have maybe been doing OK for a while might now be finding life getting a little bit tougher,” he said.
On the other hand, he said, there are pockets of the technology sector – such as companies that have found burgeoning niches in the online segment – that offer strong growth prospects regardless of the broader economic trend.
“If you can get reliable, good companies that can grow regardless of the economic environment, then people are prepared to pay more for that,” he said.