Arete was founded on the principles of independence, exclusivity and insight, taking its name from an ancient Greek word meaning "excellence and virtue". When we began in April 2000 at the peak of the dot-com bubble, the names Grubman, Spitzer and Blodget were famous, not infamous. Yet even a decade later, BUY ratings still outnumber SELLs by 5 to 1, and most analysts are still in the business of marketing the services of their bankers or the positions of their bank's proprietary traders.
Our first manifesto called for a renaissance in equity research, returning to its roots of helping investors make better informed decisions, and unearthing the facts behind perpetually-bullish headlines. We wanted nothing less than to save the analyst's profession from disrepute, and offer an antidote to the nasty cynicism around investment research. A decade later, we are delighted by a thriving and well-established independent research sector, even if there remains clear evidence of persistent deeply unethical behaviour around investment research.
The corporate pressures that led to so much flawed "research" in the 90s are now coming back: analysts are again pitching for deals. The latest wave of IPOs and M&A has proved that analysts never stopped being corporate cheerleaders, they just lacked something to shout about for a few years. There is nothing wrong with cheerleading analysts pounding the table on behalf of corporate banking clients: it should simply be called advertising and promotion, a sector which tends not to be highly remunerative.
Analysts are also writing more three-line comments than ever, which led the global head of a large investment bank’s research department to call his own firms' output "predominantly worthless flash notes". This is hardly a surprise, given surveys show the average analyst has 3-4 yrs. of experience, works 60+ hours a week, and covers 8 or fewer companies. Analysts remain reluctant to criticise management and often lack insights or experience to offer better solutions. Even the dullest analyst knows that buy notes carry favour with companies, and sell notes upset still-powerful bankers. Instead, they suffer from acute myopia: the majority of investment research in both the US and Europe is now quarterly earnings commentary.
Finally, the disclaimer from another large investment bank makes its clear what "specialists" sitting beside the research analyst are supposed to do: Front-running for the prop trading desk.
This communication has been prepared by an Industry specialist… the primary responsibility of a Industry specialist is to support the Trading desks… Readers therefore should not consider the information contained in this communication to be objective or independent of the interests of the Trading and Distribution desk concerned. You should assume that such Trading and Distribution desks are active participants in the markets, investments or strategies contained herein, including trading strategies that may have been executed on the basis of this analysis prior to its dissemination.
Our initial manifesto in 2000 criticised the penchant for hiring MBAs with little passion for, or background in industries they were assigned to cover. In our view, there is only one test for any analyst: would the companies they cover hire them, not as a fawning sycophant, but as someone to help judge the business's assets, constraints, and strategic options. Sadly, most would fail. Depth of knowledge is arguably more important than stock picking, ultimately the fund manager's job. Research requires critical thinking skills married with real world understanding of what companies can accomplish, and what they cannot.
Since 2000, Arete has proven there is an appetite and market for in-depth research, unfettered by hidden or obvious conflicts. Poorer quality product is slowly withering away (or decomposing in the recycling bin) as banks further rationalise already thinned out departments. Arete remains committed to the idea of wholly independent research, and to restoring the trust essential to healthy financial markets. We have never, nor will we take any money from companies we cover. We will continue in-depth coverage of 100+ stocks globally in technology, telecoms and alternative energy, and aim for nothing less than the best research product that we can produce.
