It’s getting so dangerous on the sell-side, even BAT pays for its personal analysis | USAEMALL.com

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Depending on who you talk to, Edison Investment Research is either the future of research or a glorified marketing agency.

Investment bank research is client-funded, so has a veneer of independence. Edison’s research is paid for by the companies it covers, so doesn’t even have that. The conflicts of interest are made transparent.

Issuer-funded research has long been the norm in credit — Moody’s, S&P and Fitch are all guns-for-hire — but only really took off for equities after MIFID 2 unbundling wrecked investment banks’ cross-funding model. Small- and mid-cap companies with complicated stories, large retail followings, or unorthodox investor-relations policies turned to the likes of Edison to fill an information gap left by the supposedly independent brokers.

Companies like . . . British American Tobacco?

BAT is not a typical Edison client. It’s the FTSE 100’s sixth-biggest constituent, with a market cap of £67bn, and is mostly owned by institutions. Neither is it under-researched. The consensus expectations published on BAT’s website are a sample of 12 analysts, none of which is Edison.

So-called connected research doesn’t, and can’t, pretend to be independent. Under UK and EU law it’s put in the same category as the marketing bumf sent out by IPO coordinators. The paid-for research houses argue that they’re just being upfront about conflicts in marketing communications, unlike the bulge-bracket investment banks, whose claims of impartiality are often seen as little more than box-ticking for a legal disclaimer.

Edison’s approach is among the most straightforward. The company describes itself as a “content-led IR business operating in all major capital markets,” whose “unique approach integrating analyst content, digital targeting and investor engagement [has] a proven history of increasing liquidity and valuations for our clients.” Buried deeper on the website is a declaration of research principles that boil down to a pledge not to do anything that might damage its reputation. (Moody’s, S&P and Fitch all have similar guiding principles, albeit with more established reputations.)

What this means in practice is . . . 

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BAT’s full-year results last week were not good. The stock’s down around 10 per cent since the release, which flagged regulatory and fiscal problems in Bangladesh and Australia to add to its Canadian strife. BAT’s guidance for around 1 per cent current-year organic growth was well below the consensus forecast, as was its operating profit range. Any investor relying solely on Edison’s summary would have been blindsided.

Remember all that stuff about equity research for the public good? Rachel Kent’s 2023 review of the UK market caused a lot of noise upon publication and has rarely been mentioned since. The FCA set out its plans in July to let asset managers pass on research costs, reversing the MIFID restrictions on bundling introduced in 2018, but on the ground nothing much has changed. Investment managers don’t want to stick customers with research costs they’d previously been taking themselves.

And while European spending on investment research ticked slightly higher last year for the first time since MIFID’s introduction, per Substantive Research data, it’s against a backdrop of mid-market broker consolidation. Coverage gaps remain.

How these trends affect a company the size of BAT is unclear. Does the post-smokes cigarette maker feel misunderstood by the investment community? Would it like a bigger, broader following? Is it unhappy with the quality or reach of the independent analyst coverage, which has eight buys and only one sell?

We’ve asked the company why it became an Edison client and have yet to hear back, but will update the post as soon as we do.

Further reading:
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