At Harbour, we believe it is best to use a mixture of quantitative and qualitative equity research to make investment decisions. Quantitative research is used as a filter to break down the investment universe, pick potential outperformers and underperformers, and support analyst and portfolio manager views with tangible numbers. Our qualitative research looks at a firm’s business model, competitive advantage, corporate governance, sustainability, and engagement with management to help us identify companies we expect will outperform.
Both quantitative and qualitative research have pros and cons. Qualitative research is often exploratory, founded on experience and judgement, and can probe in-depth into long-term expectations, as well as reasons and motivations. Quantitative research uses a formal, systematic, numerical process such as utilising actual or expected earnings or growth metrics. We believe a mixture of quantitative and qualitative approaches results in the best outcome for portfolios and clients.
Consensus “sell-side” analyst ratings
In the following research, we use stocks in the S&P/ASX 300 and the S&P/NZX Indices that are large enough to be covered by at least one analyst.
Bloomberg collects data on all “sell-side” (i.e. brokerage firm) ratings in Australia and New Zealand and forms an aggregate score for each company. In the current Australasian universe, there are over six times the number of buy-rated stocks (buys) than there are sell-rated stocks (sells).
Figure 1: Australasian universe Buy, Sell, and Hold ratings from sell-side analysts
Buy, hold and sell ratings are an aggregate analyst rating per stock which ranges from 1 to 5. 3 is neutral, above that is an aggregate buy, and below that is a sell. Source: Bloomberg and Harbour 2018.
Sell-side analysts may face extra pressures from companies they cover, such as the relationship with management, the firm’s investment banking operations, the pressure to sell research, and the pressure to have ideas to present to clients. Because of this, some analysts may be reluctant to move buys to holds or to publish a company sell rating.
Figure 2: Australasian universe Buy, Sell, and Hold ratings from sell-side analysts per industry
LHS axis: Number of companies. Buy, hold and sell ratings are an aggregate analyst rating per stock which ranges from 1 to 5. Source: Bloomberg and Harbour as at Feb 2018.
There are two sectors that have no aggregate sell ratings in Australasia – consumer staples and telecommunications. Energy, IT and utilities only have one company with an aggregate sell rating.
Sell-side research, regardless of buy, hold or sell recommendations, can be a valuable resource for qualitative and quantitative analysts. For qualitative research, analysts have specific insight and perspective on a company, its management and its strategy. Some quantitative research also uses forward-looking data provided by sell-side analysts and company guidance.
Growth Signals Australasia
In this research, growth signals reflect data from earnings per share, operating profit, sales numbers and the number of upgrades. If the outcome has a positive skew, it is classed as an “outperform”. A negative skew is an “underperform”, while a neutral skew indicates “no change”.
Figure 3: Australasian universe perform, underperform, and neutral ratings from quant growth signals
Bloomberg data and Harbour as at Feb 2018.
Outperform, underperform and neutral signals are spread somewhat evenly for New Zealand stocks. New Zealand has had strong equity returns over the last decade, underpinned by strong earnings growth and support from declining bond yields. With lower volatility and higher quality stocks, there has been less dispersion in growth forecasts. New Zealand also has less market depth, with fewer analysts making projections on the New Zealand market, which can add to lower forecast dispersion.
Australian equity returns over the last decade have been relatively variable compared to New Zealand. Hence, Australia has a larger dispersion of growth signals – 87% of stocks have an outperform or underperform signal, compared to only 13% with a neutral signal.
Figure 4: Australasian universe perform, underperform, and neutral ratings from quant growth signals
LHS axis: Number of companies. Source: Bloomberg data and Harbour as at Feb 2018.
Using quantitative data, outperform and underperform ratings are evenly spread in Australasia, although some industries currently have more favourable fundamentals than others.
Quantitative or Qualitative?
Combining both quantitative and qualitative research is a powerful way to deliver quality investment outcomes; both have strengths and limitations. Numbers can give a robust picture of the growth prospects of a company. However, for the best investment outcomes, Harbour believes it is important to also consider qualitative aspects of a firm, such as the business model, competitive advantage, corporate governance, sustainability, and more intuitive aspects of engaging with management. This goes beyond just numbers.
See the extended research article by Susanna Lee here: Behavioural Biases
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Harbour Asset Management Limited is the issuer and manager of the Harbour Investment Funds. Investors must receive and should read carefully the Product Disclosure Statement, available at www.harbourasset.co.nz. We are required to publish quarterly Fund updates showing returns and total fees during the previous year, also available at www.harbourasset.co.nz. Harbour Asset Management Limited also manages wholesale unit trusts. To invest as a Wholesale Investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013. This publication is provided in good faith for general information purposes only. Information has been prepared from sources believed to be reliable and accurate at the time of publication, but this is not guaranteed. Information, analysis or views contained herein reflect a judgement at the date of publication and are subject to change without notice. This is not intended to constitute advice to any person. To the extent that any such information, analysis, opinions or views constitutes advice, it does not consider any person’s particular financial situation or goals and, accordingly, does not constitute personalised advice under the Financial Advisers Act 2008. This does not constitute advice of a legal, accounting, tax or other nature to any persons. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. The price, value and income derived from investments may fluctuate and investors may get back less than originally invested. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Actual performance will be affected by fund charges as well as the timing of an investor’s cash flows into or out of the Fund. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Neither Harbour Asset Management Limited nor any other person guarantees repayment of any capital or any returns on capital invested in the investments. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this or its contents.