http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/6217619/Share-tips-yes-they-do-work.html
The analysis by GLG Partners, the hedge fund, suggested that recommendations from European brokers have done better than the funds over each of the past four years.
The idea that private investors armed only with simple share tips can beat most professional fund managers recalls the book Where are the Customers' Yachts? – the question asked by someone shown the lines of expensive stockbrokers' yachts in a marina, making the point that the City can seem better at making money for its own insiders than for its customers.
Whitbread GLG's research imagined a simple "long-only" fund management strategy – in other words, one that avoided trying to make money from falling shares – that followed all broker recommendations to buy particular stocks. Under the strategy, the shares are bought at the closing price on the day of the share tip and held for 65 trading days, when they are sold.
The annual returns from using this technique would be as much as 6.4 percentage points above the performance benchmarks used by fund managers, the researchers calculated. Each 65-day period would produce gains of between 0.8 and 1.69 percentage points above the benchmark, after payment of commissions, and this could be repeated four times a year.
Annual returns would therefore beat the benchmarks – which typically reflect the performance of the stock market – by between 2.8 and 6.4 percentage points.
"This is enough to place the strategy in the top quartile of UK mutual funds with a Europe-including-UK benchmark in all [of the past] four years," the researchers said. In other words, the strategy would beat at least three-quarters of British funds that invest in UK and European shares.
"This simple strategy involves implementing all recommendations over a fixed holding period for each idea [share tip]," the research added. "Obviously, there are numerous execution improvements that could be made. Our calculation of 2.8 to 6.4 percentage point gains over the benchmark is meant to be illustrative of the opportunities available for the simplest investment strategy."
The research also proposed an explanation for the fact that analysts tip more stocks as "buys" than as "sells". It pointed out that the intended "consumers" of share tips were fund managers, and they had a greater demand for buy recommendations. "The reason is simple. Most managers are long-only managers … so it makes sense that brokers would put less time into sell than buy recommendations."
There is also more to lose with an incorrect sell tip, GLG's research said. "The downside of being incorrect is greater with sell recommendations. A stock with a sell recommendation can go up by an unlimited amount – so there is unlimited potential error – while a stock with a buy recommendation can fall only by a limited amount, meaning limited potential error."
It concluded: "These factors suggest that at the very least an analyst should issue a new sell recommendation with more caution than a buy recommendation."
The analysis also cast doubt on the belief that tipsters tend to tip only shares that are already rising – "chasing momentum", in City jargon.
"In all four years, the average buy recommendation was either moving in line with the market or underperforming prior to the recommendation change. So there's relatively little evidence to suggest that analysts are 'momentum chasing' by putting buy recommendations on outperforming stocks."
The researchers' early data for 2009 suggests that this year has been an extreme one for analyst performance. "Buy recommendations have worked very well; sell recommendations very poorly." This is likely to reflect the fact that the stock market has recovered dramatically since its March low, so shares tipped as buys will have been helped by the trend in the market, while those tipped to fall may also have been dragged upwards.
Richard Hunter of Hargreaves Lansdown, the stockbroker that compiles share tips for The Daily Telegraph, said: "Investors' ability to access share research has never been greater. The proliferation of the internet, the market's movements being of wider interest to the public and an appetite from the press have meant that finding tips for larger companies is relatively straightforward."
But he advised private investors to be wary of some of the research they read. "It may have been written by an institutional broker and aimed at institutional clients. This in itself does not lessen the validity of the research, but generally an institution's attitude to risk and time frame may be vastly different to that of a private investor.
"For example, it is likely that the institutional investor will be measured by its success compared to a wider benchmark, such as the FTSE 100 or the FTSE All Share. As such, it needs to be nimble and will switch between stocks and sectors on a regular basis in an effort to outperform its peers. Furthermore, if it finds itself underperforming its targets, its attitude to risk may change as it chases higher returns."
Meanwhile, he added, the research will inevitably have been seen by its intended institutional audience, and then by the wider market, before it comes to the attention of the private investor. "Any change in market sentiment will, therefore, more than likely already have been reflected in an adjustment of the share price."
For the larger stocks, there will often be opposing views among analysts, he said. A selection of broker views on BP, for example, showed 19 rated the stock as a "strong buy" and five as a buy, while 12 recommended holding and three rated the share a "strong sell". The consensus in this case would be a buy – the opposite of three of the tips taken in isolation.
GLG's research did not say what investors might do in this situation, so investing your way to your own yacht might not be all plain sailing.
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