Market Update 11th August 2025

Truth Hurts

The chief executive of an AIM listed mining company walked out of a 1-1 meeting with me once. He had a license for a lithium mine in Portugal somewhere and was telling me that electric cars were going to be big, and lithium is a key part of the battery. What could possibly go wrong was the gist of it.

You don’t have to have met many zero revenue AIM mining companies to know the answer to this is quite a lot. It’s not definitely sensible even being in the meeting.

I was trying to ask him about some of the challenges he thought he might face, and I didn’t think I was doing much wrong. Somewhere along the line he seemed to decide I wasn’t cheering him on enough and he had better things to do. Close to a decade later the company still has no revenue and a different CEO on the website.

I was reminded about all this last week when I came across a piece of research by Jared Flake about the way equity analysts interact with CEOs on company calls and how this affects the outcome when the analysts write notes and make recommendations.

My first thought was to see if there was any equivalent work looking specifically at roughly comparable interactions between fund managers and fund selectors. While there is a wealth of research into broader behavioural biases, which I think many people are familiar with these days, there is little to nothing I can find specifically on the outcome of interaction between fund managers and fund selectors.

I guess this is maybe because most of this takes place behind closed doors and it would be harder to collect and analyse the data, if it exists at all. The CEO / analyst research is mainly done from publicly available earnings call transcripts – over 100,000 in this case.

I asked some of the fund houses if they track data internally. Something simple like does it make a difference if the meeting is on the screen or in person for example? Does one lead to more sales? Or sometimes we can end up knowing the individual salespeople or managers quite well – does this make a quantifiable difference? I would intuitively think it probably does, but does anyone really know? Is it even possible to isolate different factors like this?

I tried a non-scientific sample of five fund salespeople for Innovation purposes, all from at least medium-big fund houses that should have the resources to do this if they choose to. They mostly seem to use Salesforce (CRM software) to track meetings and make notes. They of course have meetings amongst themselves to discuss clients and strategies, but I didn’t get much sense that the Salesforce data is analysed at say the end of the year. It seems to be more just a way of tracking and staying on top of what they are doing as they go along.

So we will go back to the Flake paper. It starts by finding that managers tend to prioritise more favourable analysts (from anecdotal experience they often go first to the house broker when inviting questions) – this is maybe not surprising.

But the more interesting finding is that when managers are forced to interact with more hostile or negative analysts, the analysts tend to reduce their negativity afterwards. This reduced negativity can then in turn lead to bigger price increases in the underlying stock for two reasons.

Firstly, because it is a bigger relative change. A negative analyst switching their recommendation from sell to buy is a bigger change than an already positive analyst increasing their price target. Secondly, the manager can increase their credibility by opening themselves up to scrutiny from more negative analysts. If you are a higher quality manager, you are more likely to give good reasoning and evidence in answer to these questions.

Flake found that if a manager answers a question from a negative analyst at length (as a measurable proxy for a “good” answer), the analyst is 40% more likely to upgrade than the average negative analyst who does not ask a question. If a negative analyst asks a question and is given an unhelpful (“bad”) answer, like “we don’t disclose that”, then the analyst is 11% less likely to upgrade.

It’s not an exact comparison but I think the parallels with fund meetings are clear and valid.

Why is it important? Flake quotes a 2010 paper that found the interaction between company management and analysts explains 28% of quarterly stock returns. Again, it’s not exactly the same with funds but there are some similarities. Funds can create their own luck with inflows, which can help support the share prices of the companies they own as they reinvest those inflows – and vice versa with outflows.

We have seen this most obviously in the UK over the last few years and especially in small caps where less liquidity makes the effect more pronounced and fund outflows have added to downward pressure on these indices.

But on the other side, one large UK equity fund in particular has done extremely well over the last few years, investing mainly in larger cap UK equities. It has seen meaningful inflows as a result, against the tide of UK equities as a whole and this has supported the fund, which the manager himself believes has in turn contributed to outperformance – although I doubt we can derive a number like the 28% contribution above.

The majority of the fund meetings Emily and I do are not especially confrontational and so far at least, everyone has still been in the room at the end. But it is noticeable that different fund managers approach us differently if for example the fund has not performed well or something isn’t working. Some of them are happy to talk about it and discuss the background, while some can be more defensive.

The CEO / analyst interaction research suggests this and similar issues are best addressed openly, with some short-term pain paying off in the long run and a better outcome for everyone.

Robert Fullerton – Senior Research Analyst

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