Six Steps to Effectively Measure Analyst Performance

Six Steps to
Effectively Measure
Analyst Performance
CONTENTS
Establish the Framework
3
Invest in Technology
4
Involve the Right People
5
Build Meaningful Metrics
6
Gain Insight from
Consolidated Reports
10
Turn Insight into Action
11
Where Should You Start?
12
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H
ow do you know which analysts on your team are
performing well? Can you differentiate between who
has skill—and who’s been lucky? How are you accounting
for divergences in thinking between your analysts and
portfolio managers? How well are you linking compensation
with performance? Is there a chance that your best analysts
aren’t being recognized or rewarded—and could leave for a
place where they might be?
By building a seamless integration between
FactSet has created a
dynamic performance
management system to
help firm decision-makers
glean key insights from the
behavior, recommendations,
and results of their analysts.
our industry-leading research management
tools and powerful portfolio analytics suite,
FactSet has created a dynamic performance
management system to help firm decisionmakers glean key insights from the behavior,
recommendations, and results of their
analysts. Here, we will dig deep into how to
construct an effective analyst performance
measurement (APM) solution that will help
you quantify the impact of research and
answer the questions facing your firm, like the ones above.
Establish the Framework
The first step to building a successful APM system is to
clearly define your firm’s proprietary framework. What is
your recommendation scheme, and is it uniform across
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analysts, sectors, and regions? How is an analyst’s investible
universe determined? What is the appropriate benchmark
for each analyst? These are some of the questions that need
to be answered in order to create a straightforward solution
that measures all of your analysts in a consistent fashion.
Invest in Technology
Once you’ve developed a clear understanding of your firm’s
framework, the next step is to make sure the
right tools are in place. Smart investments
in research and analytic technologies help to
bridge the gap between analyst activity and
the ensuing results.
Data Storage/Research
Management Platform
mart investments in
S
research and analytic
technologies help to
bridge the gap between
analyst activity and
the ensuing results.
This is the platform where your analysts
store, retrieve, and share their research,
notes, ideas, and recommendations. An
effective platform should boost cross-firm collaboration
and help ensure research continuity even when an analyst
leaves the firm. Ease of use is essential—analysts should be
empowered to enter research from their desktop, mobile
device, or email so no idea is lost or forgotten. A fully
customizable environment will allow you to build fields for
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the metrics your firm monitors. This central location is where
your APM solution is going to begin mining data.
Powerful Analytics Engine
A strong and flexible analytics engine is necessary for you
to review your research data and identify key, decisiondriving insights. The analysis can range from digging deep
into the absolute and relative performance
of your analysts’ decisions, to identifying
An effective platform
should boost cross-firm
collaboration and help
ensure research continuity
even when an analyst
leaves the firm. Ease of
use is essential.
which analysts had the best returns, to
discovering how often your portfolio
managers took the advice of your analysts,
and much more. A system that includes a
library of standard reports, along with the
ability to create customizable reports, can
make it easy for busy Directors of Research
and C-level executives to quickly review
analyst performance across the firm.
With these technologies in place, data
aggregation and performance analysis become an
automated process that can save you time and remove
the risk of human error.
Involve the Right People
If you’re investing in new technologies, it’s crucial to get
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buy-in from impacted employees. In the case of APM, it is
critical to ensure that all analysts make use of your research
management platform. This can be either FactSet’s Research
Management Solutions (RMS) or another platform that feeds
into your analytics engine.
Whatever your firm’s current research management solution,
it’s critical that your staff make consistent use of it. Often,
instruction from the Director of Research is all
it will take to encourage usage. In other cases,
an explanation of how the data will be used—
to help give analysts credit for their work and
ensure compensation is commensurate with
individual performance—will be more than
enough incentive.
One way to encourage engagement is by
simply highlighting ease of use. A solid
platform levels the playing field by
An explanation of how
the data will be used—
to help give analysts
credit for their work and
ensure compensation is
commensurate with
individual performance
—will be more than
enough incentive.
standardizing data entry. A new analyst or
one familiar with the system will be able to
navigate the platform with the same comfort level.
Build Meaningful Metrics
The technology is in place, your employees are on board,
and data is flowing from your research management platform to your analytics engine. Now what?
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This is when you must identify exactly what you’d like to
measure. Metrics should be quantifiable, and must directly
impact your firm’s performance. Here are a few questions to
get you started:
+
Which analyst had the best absolute returns? Which
one had the best returns relative to their benchmark?
+
How frequently did strong buys and buys
outperform sells?
+
How frequently and by what deviation
were internal ratings consistent with
broker forecasts?
Which analyst had the best
absolute returns? Which
one had the best returns
relative to their benchmark?
+
How do analyst rating changes compare
to price fluctuations; specifically, do rating
changes lead or lag price changes?
+
How have rating changes impacted
overall stock performance?
+
How often did the portfolio manager
listen to the guidance of the analyst?
Did the timing of a portfolio manager’s
purchase or sale align with an analyst’s
rating change?
+
What is the target price upside potential and does it
correlate with the ratings?
Let’s pick a few of these questions and take a look at the
charts and reports that make them easy to analyze.
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Which analyst performed the best during the year?
This Portfolio Dashboard report aggregates data from the recommendations and actions of several analysts to calculate
their performance across multiple timeframes. It shows that several analysts beat their sector benchmark month-to-date,
quarter-to-date, and year-to-date, while a few have consistently underperformed.
How often did the portfolio manager listen to the guidance of the analyst?
Did the timing of a portfolio manager’s purchase or sale align with the
analyst’s rating change?
A look at the Attribution Report for one analyst, Lata P., shows us that while she had a positive return for the selected period, the
overall universe – in this case, Healthcare – had a larger return. We would expect for our highest returns to come from strong buys
and our lowest, even negative, returns to come from sells. However, this report shows that sells were up instead of down.
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How frequently and by what deviation were internal ratings consistent with broker forecasts?
Here, we see from the Watchlist that our research analyst currently has a sell rating on AbbVie, Inc. while the mean sell-side rating
is a buy. Looking across the universe in the Targets & Ratings report, we can see that a small percentage of the brokers also have
a sell rating, although the overwhelming majority have a buy.
Did strong buys and buys outperform sells?
In this chart, we see that AbbVie is held in the Large Cap Growth fund but is not held in the Large Cap Value fund. As the price of
AbbVie went up, our research analyst downgraded her rating – but the portfolio manager for the Large Cap Value fund increased
his shares in the stock.
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Gain Insight from
Consolidated Reports
Now that you’ve identified key metrics
and have decided how you’d like to assess
analyst performance, you’re likely going to
want an easy, efficient way to review and
share the results. While performance analysts
may have the time to weed through
various individual reports, a busy Director
of Research or CIO might benefit from a
high-level report that allows them to quickly
Overview reports can
display summary
information for multiple
analysts so that key data
points are easy for senior
management to review.
and succinctly review performance across
their firm throughout the year, not just at
year-end. Production-quality overview
reports that are designed to your firm’s
specifications (including your brand’s
logo, colors, and disclaimers) can display
summary information for multiple analysts
so that key data points are easy for
senior management to review. Analysts
can self-monitor their performance with
tearsheets to ensure that their coverage
changes have been correctly accounted for
on both a current and historic basis.
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Turn Insight into Action
By this time, you’ve built a seamless solution that allows
you to review the impact your analysts’ research has on your
firm’s results. Now what do you do with this information?
First and most obviously, you can use these findings to more
accurately and holistically provide performance evaluations.
You now have quantitative information to supplement the
traditional qualitative information you may
have relied on in the past. Leverage these
You now have quantitative
information to supplement
the traditional qualitative
information you may have
relied on in the past.
findings to make sure you’re appropriately
compensating your best performers.
Consider carefully tracking the ideas of your
best performers as well. Look for “bright
spots,” or superb talent, who consistently
outperform the rest of the team. Work with
them to understand what has contributed
to their results, and apply these learnings
to weaker performers. Take note of their
future recommendations to make sure successful ideas
don’t go unnoticed.
Look for gaps in coverage. Particularly if you’re at a smaller
firm, use this data to recognize whether there are sectors or
industries that aren’t being as thoroughly researched as others.
Global firms should also look for areas of overlap—are there
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redundancies in your analysts’ responsibilities? Look to the
data for an aggregation in one area.
Address gaps in communication. Do you have an analyst
that’s made consistently good recommendations that your
portfolio manager hasn’t acted on? Make sure divergences in
thinking are resolved.
Recruit! When speaking with desirable candidates,
showcase the fact that their performance
will be evaluated on an individual basis.
This can be incredibly compelling for an
analyst that’s confident in their own
abilities and would like recognition for
their contributions.
Where Should You Start?
Instituting an analyst performance
When speaking with
desirable candidates,
showcase the fact that
their performance will
be evaluated on an
individual basis.
measurement system begins with thoroughly
evaluating your firm’s current processes. A
FactSet representative can guide you through
implementation by helping you ask and answer the right
questions—from identifying the best technology while
optimizing the tools your team is already using; to inspiring
your analysts to become committed to submitting research
and ideas; to defining metrics that will lead to new insights;
to customizing reports that help you digest your solution’s
findings; to leveraging your findings in every area.
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To learn more about
FactSet Research
Management Solutions
and to get started building
your Analyst Performance
Measurement platform,
visit FactSet.com/RMS.
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