Soundness of Schwab’s play for research arm questioned
Charles Schwab Corp. is making another push to graft a big brain onto its athletic body as an earlier effort sputters.
The San Francisco-based company plans to pay $345 million in cash to acquire SoundView Technology Group Inc., which includes $100 million cash on Soundview’s balance sheet.
The purchase of a research company employing human researchers comes at a time when Schwab has quietly allowed that its computer-generated Schwab Equity Ratings system is shooting blanks. But stock analysts and independent advisers alike question the wisdom of Schwab kneeling at the altar of expensive proprietary research.
“I shook my head when I saw the news,” says Richard D. Steinberg, president of Steinberg Global Asset Management Ltd. of Boca Raton, Fla.
“Research is a commodity,” adds the adviser, who keeps most of his firm’s $315 million under management with Schwab. “It doesn’t have any value to me.”
misleading ratings
The addition of the 237-employee research boutique in Old Greenwich, Conn., is primarily intended to assist institutional investors with research covering five industry sectors.
These sectors include technology, media, telecommunications, aerospace/defense and healthcare.
But Schwab intends to eventually disseminate the research throughout its investor base.
“It is a major step in expanding Schwab’s depth and breadth of market wisdom, which is a strategic imperative spanning our entire corporation,” David S. Pottruck, Schwab’s chief executive, said in a Nov. 19 statement announcing the deal.
To be sure, Schwab’s equity ratings system has performed poorly, and in an unexpected twist, A-rated stocks are performing worse than its F-rated stocks. Since the ratings system’s May 2002 inception, its F-rated stocks outperformed its D-rated stocks. Its D-rated stocks beat its C and B-rated stocks, which tied, and its A-rated stocks performed worst of all. A and B stocks are supposed to trigger purchases. F and D ratings suggest an investor should sell. C ratings are neutral.
Schwab spokesman Lance Berg says that the poor track record of Schwab Equity Ratings reflects its approach, which typically penalizes volatile risky stocks that have weak fundamentals. It awards such stocks D or F ratings.
“We’ve seen performance suffer due to unusual market conditions,” he adds.
He further explains that the SoundView purchase complements Schwab Equity Ratings and is not intended to replace any research offering at Schwab.
Indeed, with its investment in 28 senior and 21 junior analysts – and shedding of the investment-banking arm of SoundView – Schwab says it is plowing new ground.
“We’re creating a ‘category of one,’” said the company in a statement when the purchase was announced.
For now, Schwab is prevented from discussing the SoundView deal. Until it is finalized in January, Schwab is restrained by Securities and Exchange Commission rules that prevent public corporations from discussing pending acquisitions.
Skeptics abound
But Gary Pollock, president of Bay Isle Financial LLC,which has $1.1 billion under management, says he is skeptical of the purchase, both as a Schwab shareholder and as its partner through Schwab Institutional.
“I don’t see that as something that will benefit – or be detrimental – to advisers like us,” says the Oakland, Calif.-based adviser.
He adds that he fears this purchase may have similarities to Schwab’s acquisition of U.S. Trust Corp. in New York.
“It hasn’t been as successful as I hoped it would be,” he says.
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