Perspectives on the Buy-Side:How Are Decisions Made?

(A National Study among US Portfolio Managers and Buy-Side Analysts)

Gene RubinVice President

Established in 1991

One core competency – marketing research

A unique specialty – investment professionals

5000 interviews annually

Clients include half of the Fortune 100

Background on Rivel Research Group

Study Background

306 telephone interviews on the buy-side

+/- 6% margin of error on total data

213 portfolio managers

167 buy-side analysts

Totals include 74 who perform both functions equally

Other subgroup breakdowns

95 Large Institutions, 80 Medium, 131 Small

134 Northeast, 67 Midwest, 52 South, 53 West

150 Large-Cap Focus, 85 Mid-Cap, 65 Small-Cap

55 Growth, 123 GARP, 91 Value, 28 Total Return

101 Asset Management, 57 Mutual Fund, 25 Pension Fund, 24 Hedge Fund

Study Background

Research Objectives:

Identify core drivers of investment decisions

Clarify most valued information resources

Measure the impact of investor relations

Delineate communications opportunities

How Decisions Are Made

Three Steps of the Process

Making the Radar Screen

Inducing a Buy Decision or Recommendation

Staying in the Portfolio

Making the Radar Screen

How do you make it to the radar screen?

In house research – 85%

Brokerage house research – 75%

Articles in business/trade publications – 75%

Independent research – 71%

Quarterly earnings conference calls – 60%

Group presentations from corporate executives – 57%

One-on-one meetings with corporate executives – 57%

SEC filings – 54%

Annual reports – 51%

Making the Radar Screen

 

Large-cap investors Mid-cap investors Small-cap investors

In-house research In-house research In-house research

Business/trade articles Brokerage house research Business/trade articles

Brokerage house research Business/trade articles Brokerage house research

Independent research Independent research One-on-one meetings

Earnings conference calls Earnings conference calls Group presentations

Top five means of bringing stocks to attention by respondents’ cap-size focus

Making the Radar Screen

 

Top five means of bringing stocks to attention by respondents’ investment style

Growth GARP Value

Brokerage house research In-house research In-house research

In-house research Brokerage house research Business/trade articles

Business/trade articles Business/trade articles Brokerage house research

One-one meetings Independent research Independent research

Group presentations Earnings conference calls One-one meetings

Making the Radar Screen

What if I am a small cap company?

Will not look at small caps – 28%

Improve financials – 23%

Be visible/proactive – 20%

Attract sell-side coverage – 11%

Avoid appearing “complex”

Management needs to go on the road with sell-side even if they have no plans to cover the stock

*Manage internal expectations well and set realistic goals

Making the Radar Screen

Is targeting worth my time? How receptive is this group to targeting inquiries?

Total managers – 73% not receptive

Large cap managers – 74% not receptive

Small cap managers – 58% not receptive

Manage expectations because targeting is labor intensive and rejection is constant.

Inducing Purchase/Recommendation

In house research – 79%

SEC filings – 71%

Quarterly conference calls – 70%

Independent research – 68%

Brokerage house research – 66%

Annual reports – 64%

One-on-one meetings with corporate executives* – 62%

Group presentations from corporate executives – 60%

Articles in business and trade publications – 60%

We made it to the radar screen, what becomes important?

Top five means of evaluating stocks by respondents’ cap-size focus

Large-cap investors Mid-cap investors Small-cap investors

In-house research In-house research One-on-one meetings

Independent research SEC filings SEC filings

Earnings conference calls One-on-one meetings Group presentations

Brokerage house research Earnings conference calls In-house research

SEC filings Brokerage house research Earnings conference calls

Inducing Purchase/Recommendation

Top five means of evaluating stocks by respondents’ investment style

Growth GARP Value

SEC filings In-house research SEC filings

One-on-one meetings Earnings conference calls One-on-one meetings

In-house research Independent research Earnings conference calls

Earnings conference calls Brokerage house research In-house research

Brokerage house research SEC filings Group presentations

Inducing Purchase/Recommendation

Management credibility – 83%

Effective business strategy – 77%

Reliable cash flow – 72%

Attractive growth in EPS – 68%

Strong balance sheet – 61%

Economic/industry trends – 48%

Innovative products/services – 44%

Corporate governance – 42%

Strong corporate culture – 33%

Attractive dividend – 13%

Where are they focused for their in-house research? A mixture of tangible and intangible factors...

Inducing Purchase/Recommendation

Components of Management Credibility

8%

9%

43%

68%

15%

Knowledge of thesector/business

Articulate consistentstory

Act in best interests ofshareholders

Honesty/forthright/open

Meet/exceed goalsarticulated

Inducing Purchase or Recommendation

Inducing Purchase or Recommendation

Face-to-face: 42% indicate they “see” senior

executives at least 3 times before purchase!

Need to communicate a concise strategy and clearly defined

short-term and long-term goals

Need to convey well-defined metrics for investment

professionals to measure progress

Need to be honest about obstacles and what can go wrong

Need to show progress against self-established goals

So, how do we communicate intangibles?

22% BSAs and PMs chose not buy or cover a company which did not provide earnings guidance

over the past 12 months

Return on invested capital – 58%

Revenue growth – 54%

Earnings per share – 53%

Return on equity – 48%

P/E ratio – 43%

Discounted cash flow – 39%

EBITDA – 39%

Economic value added – 23%

Book value – 19%

What else are they looking for? Tangible metrics to complete the picture.

Inducing Purchase/Recommendation

Inducing Purchase or Recommendation

Who should go? Question: which of the following executives have you met prior to purchasing/recommending a stock?

CFO – 86%

CEO or President – 77%

IRO – 66%

Key Operating Executives – 36%

Inducing Purchase or Recommendation

CHALLENGE:

CEOs biggest frustrations with the investment community:

43% - too short-term oriented*

34% - lack sufficient knowledge about company*

21% - too many companies for analysts to cover well*

*Data from Rivel’s 2006 “Perspectives from the CEO” study

CEO’s spend 12% of their time communicating with the investment community*

They do not want to spend more*

Inducing Purchase or Recommendation

Time Spent with Investment Community is:

Adequate 85% Adequate 85%

More than adequate 7% More than adequate 7%

Inadequate 8% Inadequate 8% *Data from Rivel’s 2006 “Perspectives from the CEO” study

What Role Does Investor Relations Play?

Question: As a result of interaction you have had with investor relations officers how frequently has the following occurred?

26% 25%

17%20%

18%22% 23%

26%

34% 38%

29% 22%18% 16% 12%

28%27% 25%

30%

38%

Requested meeting

Issued Recommendation

Purchased stock

Recommended to colleagues

Sold stock

Often

Sometimes

Hardly ever

Never

56% 50%

Staying in the Portfolio

Quarterly conference call – 79%

In house research – 79%

SEC filings – 73%

Brokerage house research - 69%

Independent research – 66%

One-on-one meetings with corporate executives – 63%

Annual reports – 63%

Articles in business and trade publications – 63%

Group presentations from corporate executives – 58%

Corporate websites 52%

What communications are important? Question: What types of communications are most helpful after stock purchase?

You made it into the portfolio – Now what?

Staying in the Portfolio

Top five means of monitoring performance after purchase/recommending a stock by respondents’ cap-size focus

Large-cap investors Mid-cap investors Small-cap investors

In-house research Earnings conference calls Earnings conference calls

Earnings conference calls SEC filings One-on-one meetings

Brokerage house research In-house research Group presentations

Independent research One-on-one meetings SEC filings

Business/trade articles Brokerage house research In-house research

Staying in the Portfolio

Top five means of monitoring performance after purchase/recommending a stock by respondents’ investment style

Growth GARP Value

Earnings conference calls In-house research Earnings conference calls

SEC filings Earnings conference calls SEC filings

In-house research Brokerage house research One-on-one meetings

One-on-one meetings Independent research In-house research

Brokerage house research SEC filings Presentations/annual reports

Staying in the Portfolio

34% – Once (33% PMs: 40% BSAs)

30% – Never (38% PMs: 18% BSAs)

15% – Twice

14% – Three(+)

If they own or recommend our stock, how often do they need to see management (yr)?

Covet the buy-side analyst, their role has grown immensely, key figure, importance across all aspects of decision-making process.

Sell-side research remains a central source for (especially):

Getting on the buy-side radar screens

Monitoring the stock while it is in a portfolio

Targeting-going directly to the buy-side to generate interest without true management commitment and proper resource allocation will likely result in a waste of time. Must manage expectations.

It’s not all about the numbers. Management needs to be on the road (often) talking about strategy, setting goals, meeting them and telling the truth, which leads to credibility.

Shift in metrics that are used to value companies, now it’s “who is going to invest their cash the best?”

IR affects investment decisions-needs a seat at the table at all times.