Companies are complicated.
Investment is tricky.
Predictions are hard to make, especially about the future.
What's needed are local guides who
try to point investors in the right direction.
We have them in the form of securities analysts.
These professionals typically work for brokers, investment
banks, and fund managers.
They do statistical analysis and talk to company bosses.
Recently, they seem to have been in retreat.
What's gone wrong for them?
First, regulation has tightened up.
Customers have decided fewer analysts are needed.
Second, investment is changing.
Customers, who are mostly active managers, are in retreat too.
Third, the focus of big business is shifting.
Companies are beginning to see a purpose
broader than shareholder value.
Many analysts specialise in valuations
based on next year's profits.
That's an important skill, but a narrow one.
Are securities analysts doomed?
Are analysts now as obsolete as diesel cars or cassette
players?
Let's consider each challenge.
The regulatory hit comes from Mifid II in the EU.
Commentators have likened it to the triffid,
a fictional man-eating plant.
Before Mifid II, fund managers routed their trades
to a broker to execute on the market.
In return, brokers charged commissions
that included the cost of research
received by the fund manager.
Mifid II required fund managers to disclose this cost
to their clients.
Embarrassed, they decided they needed less of it.
The trend is spilling over into the US.
Other changes are thinning the ranks of securities analysts.
Index funds, which passively track market benchmarks,
are growing fast.
PwC forecasts index funds will account for half the US total
by 2025.
But Lex thinks reports of the death of the securities
analysts are exaggerated.
Here's why.
Analysts blind to societal change
are as doomed as any other professionals.
Those who adapt are not.
They can calculate discounts on oil and gas reserves
due to climate change, for example.
Index funds have made smaller inroads than worriers imagined.
And their share of the US stock market is only 13 per cent.
Moreover, part of the justification for index funds
is misleading.
They are certainly low cost and may
appear to remove human error.
But in reality, index compilers can still make bad choices.
They could trap investors in weak sectors
during downturns when it could increase financial instability.
Finally, people will always need other people
to study the numbers behind investment.
UK and US brokers may require fewer analysts.
Other employers may want more.
Data from the CFA Institute show demand to take its tough exams
is rising sharply in Asia and is steady elsewhere.
The securities analysts is dead.
Long live the securities analyst.