Equity researchers are copping heat amid stock report retractions
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Sell-side research is in the spotlight this week after health monitoring tech G Medical Innovations withdrew an analyst report citing prospective sales and production targets.
Sell-side analysts typically work for investment banks writing research reports on stocks — often adding buy, hold or sell recommendations — in the hope of attracting institutional buyers. Sometimes the analysts are paid by companies featured in the reports.
(Buy-side equity researchers, on the other hand, typically work for funds and research stocks in order to make investments — often using sell-side research to make their decisions).
On Tuesday, a report released by equities analyst TMT Analytics set out targets for G Medical’s medical smartphone case and G Medical Patch, and prospective financial information based on production and sales targets.
In the research report, TMT labelled G Medical (ASX:GMV) a buy and named a target price almost three times that of G Medical’s trading price.
But on Wednesday, G Medical (ASX:GMV) said in an ASX announcement that it did not have “reasonable grounds” to support the research report’s statements and advised investors to ignore the information.
G Medical confirmed in the ASX announcement that TMT “is paid by G Medical to provide ongoing research coverage”.
The research was pulled down from the analyst’s website, citing ASIC regulation.
“Although the prospective information was prepared and released by TMT Analytics rather than G Medical, G Medical wishes to ensure that investors do not make investment decisions based on the prospective information. The analyst report has now been withdrawn,” G Medical told investors on Wednesday.
G Medical confirmed it had seen the report prior to release — but had not approved it.
The incident has led to the establishment of protocols within the company to ensure it doesn’t happen again.
MyFiziq research retracted
Two weeks ago a research report from Red Leaf Securities for MyFiziq (ASX:MYQ) was also retracted.
After questioning from the ASX, MyFiziq noted what it called “material errors” in the revenue projections.
“There were material errors in the headings in the tables in the research reports which included the forecasts which had the effect of bringing forward the revenue projections by one year,” MyFiziq told investors in an ASX announcement.
“Following consultation with the ASX, the company advises that it retracts, without any admission of liability, the announcements, the research reports and the forecasts.”
MyFiziq confirmed in the ASX announcement that it had “commissioned and paid for the research reports”.
After the retraction, MyFiziq’s share price dropped 30 per cent.
Sellside research under the microscope
The issue hasn’t gone unnoticed by market regulator ASIC.
In its March Market Integrity Report, ASIC listed sell-side research as a key focus.
“The timely flow of information and objective research analysis is vital to fair and efficient markets,” ASIC said.
“Investors consider sell-side research when making investment decisions. It is critical that sell-side research represents the genuine, professional opinion of analysts,” ASIC commissioner Cathie Armour said.
ASIC released regulatory guidance in December – outlining a six-month period for industry players to conform to expectations set out in the guide.
ASIC’s move comes as part of a global groundswell on equity research. The EU implemented reforms known as MiFID II in January.
The reform calls for the explicit unbundling of charges for execution services and investment research by banks and brokers. While they may be applicable only to European asset managers, consulting firm McKinsey believes the impact is likely to be broader.
“The result could be a sharp decline in the demand for equity research: the consensus view of banks we surveyed calls for an industry-wide drop in equity-research revenues of 30 per cent or more over the next three years, although other scenarios could well play out.”
Consultant PriceWaterhouseCoopers also cites reform as a challenge bearing down on the investment industry:
“This regulatory obligation will pose significant challenges for the industry as sell side firms must complete these activities and disclose the associated costs and charges to buy-side firms in order for them to demonstrate that they are acting in their best interests and have not been induced to trade,” its Future of Research report reads.