Brokerages were better at picking stocks than money managers, according to study running from 1997 through 2004.
Much better, in fact.
On the money manager side, chosen stocks stamped with a “buy” and “strong buy” recommendations produced an annual market-adjusted return of 2.3 percent, compared with an 8.1 percent average for the brokerages, the study found.
“The findings raise questions about why investment firms continue to fund buy-side research and do not simply rely on the sell-side,” said the authors of the report.
“Our evidence on the stock performance of buy-side recommendations is less surprising than the remarkably strong performance of the sell-side.”
Competition among brokerages as well as the need to publish results may be behind the difference.
“It's the scrutiny,” Partha Mohanram, a finance professor at Columbia University in New York who wasn’t involved in the study, told Bloomberg.
“There is a reputation cost for being wrong. Buy-side research is not that kind of competition. It’s different kinds of clients.”
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