How the Independents Fared

In the wake of the Wall Street analyst scandals, independent research seemed to be just what ordinary investors needed. The Securities & Exchange Commission and New York State Attorney General Eliot Spitzer certainly thought so when they imposed the $1.4 billion global settlement on 10 investment banks in April, 2003, forcing them to provide such research to their customers. But it turns out that simply eliminating the bankers' conflicts of interest from stockpicking won't make it much easier for investors to beat the stock market indexes.

That's abundantly clear from a ranking of 121 out of some 300 independent research shops now in business compiled by, an online analyst-rating service, on behalf of BusinessWeek. Only three of the research houses managed to beat the 11% rise in the Standard & Poor's 500-stock index in the year through July 12.

Why were most independents' performances so lousy? Because the surge in the market mainly came from highly speculative, poor-quality stocks that they avoid. That hurt the value investors, who run many of the independent shops: They look for solid companies with good prospects that are selling cheap.

The best performer, Greenwich Investment Research, a tiny upstart, was up over 28%. Over the year, Greenwich principal Chris Hackett recommended just seven investments -- both buys and sells -- in a few downtrodden energy and utility stocks. "I run a pretty concentrated portfolio," he says.

Most of the independents pick more stocks to spread the risks wider. Consider Chicago-based Thomas White International, up nearly 5% in the period. It makes buy and sell recommendations on nearly 2,500 stocks. "We don't turn lead into gold," says Thomas S. White Jr., president. White says that, for most independents, "[performance] looks better in a down market and worse in an up market. You have to look over the long term and see how they do."

Investors will find those long-term records hard to come by. Although many independent shops have been around for years, the trackers are few and new to the industry. Kei Kianpoor, chief executive of Investars, says his data shows that independ-ent researchers have outperformed Wall Street analysts for the past three years. Of course, there's no guarantee they will maintain that record. However, says Kianpoor, "what matters most is not the difference between Wall Street and the independents but the transparency of the returns and access to the information by individual investors."

Ratings tables such as ours are just the first step in helping investors select an independent researcher to follow. They are the basis for -- what else? -- more research.

By Mara Der Hovanesian in New York

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