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

Perspectives on the Buy-Side: How Are Decisions Made?. (A National Study among US Portfolio Managers and Buy-Side Analysts) Gene Rubin Vice President. Background on Rivel Research Group. Established in 1991 One core competency – marketing research

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

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  1. Perspectives on the Buy-Side: How Are Decisions Made? (A National Study among US Portfolio Managers and Buy-Side Analysts) Gene Rubin Vice President

  2. Background on Rivel Research Group Established in 1991 One core competency – marketing research A unique specialty – investment professionals 5000 interviews annually Clients include half of the Fortune 100

  3. Study Background 306 telephone interviews on the buy-side 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 +/- 6% margin of error on total data

  4. Study Background Research Objectives: Identify core drivers of investment decisions Clarify most valued information resources Measure the impact of investor relations Delineate communications opportunities

  5. How Decisions Are Made Three Steps of the Process Making the Radar Screen Inducing a Buy Decision or Recommendation Staying in the Portfolio

  6. 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%

  7. Making the Radar Screen Top five means of bringing stocks to attention by respondents’ cap-size focus

  8. Making the Radar Screen Top five means of bringing stocks to attention by respondents’ investment style

  9. 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

  10. 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.

  11. Inducing Purchase/Recommendation We made it to the radar screen, what becomes important? 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%

  12. Inducing Purchase/Recommendation Top five means of evaluating stocks by respondents’ cap-size focus

  13. Inducing Purchase/Recommendation Top five means of evaluating stocks by respondents’ investment style

  14. Inducing Purchase/Recommendation Where are they focused for their in-house research? A mixture of tangible and intangible factors... 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%

  15. Inducing Purchase or Recommendation Components of Management Credibility

  16. Inducing Purchase or Recommendation So, how do we communicate intangibles? 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 22% BSAs and PMs chose not buy or cover a company which did not provide earnings guidance over the past 12 months

  17. Inducing Purchase/Recommendation What else are they looking for? Tangible metrics to complete the picture. 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%

  18. 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%

  19. 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

  20. Inducing Purchase or Recommendation CEO’s spend 12% of their time communicating with the investment community* They do not want to spend more* Time Spent with Investment Community is: Adequate 85% More than adequate 7% Inadequate 8% *Data from Rivel’s 2006 “Perspectives from the CEO” study

  21. 56% 50% Often 12% Sometimes 16% 18% 22% Hardly ever 29% Never 38% 38% 34% 30% 26% 22% 23% 17% 18% 20% 27% 26% 25% 25% 28% Requested meeting Purchased stock Recommended to colleagues Sold stock Issued Recommendation 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?

  22. Staying in the Portfolio You made it into the portfolio – Now what? What communications are important? Question: What types of communications are most helpful after stock purchase? 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%

  23. Staying in the Portfolio Top five means of monitoring performance after purchase/recommending a stock by respondents’ cap-size focus

  24. Staying in the Portfolio Top five means of monitoring performance after purchase/recommending a stock by respondents’ investment style

  25. Staying in the Portfolio If they own or recommend our stock, how often do they need to see management (yr)? 34% – Once (33% PMs: 40% BSAs) 30% – Never (38% PMs: 18% BSAs) 15% – Twice 14% – Three(+)

  26. 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.

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