Investor demand for new investment ideas and technology in Asia is driving fierce competition among providers of those services, as independent agency brokers and smaller firms compete against the large, research-driven models of the big banks. The competition for client business in the Asia-Pacific equity secondary market is becoming more intense, and while the top-ranked research firms are very profitable, some market participants question just how long some of the new entrants will survive. There’s an opportunity, believes Jesse Lentchner, chief executive, Asia Pacific, at BTIG, for firms without the scale and resources of a global investment bank to win market share. “I think the bulge-bracket firms have become too structured,” says Lentchner. “Your typical salesperson there spends 60% of his day selling research, 20% selling deals and 20% on internal admin. If he’s extraordinary, he or she then finds extra time in evenings or weekends to work on ideas for clients. Without the research, the deals, the admin, our salespeople can focus on ideas.”
Maintaining teams of analysts across Asia’s main equity markets is an expensive business, and with clients still hungry for research the smaller agency brokers can’t hope to compete on how comprehensive or frequent their coverage is.
“If you’re a top-rated research firm,” says Lentchner, “you make money. If you’re third-ranked, you break even… but I think everyone outside the top five probably loses money, so if you’re just starting now, it’s going to be very tough for a few years.”
That means that smaller brokers, rather than pump out rote coverage of the important corporates, have to persuade clients that their ideas are worth attention. That involves, in some cases, importing strategies from more developed markets to Asia and tailoring them to suit local conditions. Louis Capital Markets, for example, is a Hong Kong-based agency broker that has launched Asia-Pacific merger arbitrage coverage, as the head of the business, Gregory Lafitte, explains: “A lot of the firm’s clients in Europe are interested in Asia opportunities because European markets are so quiet – 2010 saw a greater number of deals in Asia than in Europe and a higher overall volume.”
When an M&A deal is announced in Asia, Lafitte will publish a note with an immediate recommendation, followed up by daily and weekly briefings on the main deals taking place in the region. With many high-profile deals, such as Singapore Stock Exchange’s bid for its Australian equivalent subject to political approval, there is plenty of the uncertainty around the likelihood of completion that is required for arbitrage opportunities to emerge.
New ideas are coming to Asia’s equity markets from sources away from the bulge-bracket banks. Sebastian Ceria was associate professor of decision, risk and operations at Columbia Business School until he founded his company, Axioma. Now he is marketing the firm’s flagship product, a portfolio optimization tool that attempts to reduce correlation risk, to Asia’s increasingly sophisticated client base as well as adapting iterations of the product that cover specific Asian markets with their local idiosyncrasies of correlation and risk. “In 2010 there was a huge spike in industry-to-industry correlations,” he says, “so that for example a crisis in the oil sector affects all the other industries much more than it used to. That makes it increasingly difficult for investment managers to outperform the market.”
Ceria’s pitch to investors is that rather than think of the performance of a stock as “market return plus something else” – that is, beta – they can deconstruct via Axioma’s tools that beta into various factors such as location, sector, and so-called style factors such as value, growth and momentum. Of course most investors already consider these factors intuitively but Ceria believes that there is room for investors in Asia, indeed worldwide, to further combine fundamental analysis of stocks with a more quantitative, mathematical appreciation of the portfolio as a whole. That involves using the kind of sophisticated risk tools that he is marketing.
See also:
Hutch puts its trust in Singapore
Client demand drives cut-throat Asia ideas competition
HPH Trust – The big moment
