Money managers consider more than just an analyst’s stock-picking skills when casting votes in Institutional Investor’s All-America Research Team survey. That’s a good thing, because in a year as tumultuous and unpredictable as 2008 has been, some very good analysts made some very bad calls — especially in the financial services industry.
Take Todd Bault, for instance. The Sanford C. Bernstein & Co. analyst, who is No. 1 for a fifth straight year in Insurance/Nonlife, was bullish on troubled insurer American International Group right up to the moment in September when it was seized by the U.S. government, having lost 94.2 percent of its value since January.
“Todd’s stock picking has not been great,” acknowledges one money manager who voted for him. “However, he thinks about the space in a creative way, understands the main drivers and articulates his themes well.”
Bault asserts that changes in accounting rules — the mark-to-market requirement — have resulted in insurers like AIG appearing less stable than they are, and their share prices have been unfairly pummeled.
“The basic business of most insurers is not being impacted by this credit crisis. What is being impacted is the asset side of their balance sheets,” he says. “Assets are held as available for sale, and because of that they have to be marked to market even though the insurance companies are holding them to maturity. In ordinary times that is not a big deal, but in this crisis the asset-backed securities have been marked relentlessly down and down and down.”
Bault explains his recommendation — and his thoughts on what the future holds for insurance companies and other financial services firms — in our roundtable discussion, The Future of American Finance.
Polling for the All-America Research Team survey concluded in mid-July, before Uncle Sam seized the company that Bault so strongly recommended to investors.
Guy Moszkowski wasn’t so lucky. The Merrill Lynch analyst spent the previous four years as the top-ranked analyst in Brokers & Asset Managers but slips to No. 3 this year in part because he recommended Bear Stearns Cos. in January.
At the time, the call seemed to make sense. Bear Stearns shares had fallen to $77.75, nearly $100 less than they were one year earlier, and Moszkowski sensed a bargain. Two months later the federal government arranged for the firm to be acquired by JPMorgan Chase & Co. for a measly $2 a share (although the price was subsequently raised to a not-much-better $10 a share).
Moszkowski’s Bear Stearns misfire “probably cost me some votes,” he says.
Nonetheless, he retains an avid following. “Guy is a very thorough analyst, with strong industry research and coherent recommendations,” says one supporter. “And he’s not afraid to admit when he’s been wrong.”
That is an important quality to have because, in this volatile economic environment, no analyst can be right all the time — and analysts add value above and beyond their individual stock picks.
Bruce Harting, who covers Consumer Finance for Barclays Capital since its parent acquired Lehman Brothers last month, offers a compelling case in point. Harting was urging clients to overweight mortgage lenders Fannie Mae and Freddie Mac right up until they were seized by the federal government, in September.
“He is one of the most knowledgeable analysts in the sector,” says one portfolio manager whose support helped push Harting to a fourth straight year at No. 1, “but I do not follow his advice on stock picks.”
