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ING Barings could scarcely have chosen a worse time to slip down the rankings in Euromoney/Global Investor’sseventh annual institutional fund managers’ assessments of Asian equity research. The region is attracting more players and competition is cutthroat. The overall ranking is based on a simple question put to fund managers: Which firm has the best analysts in the Asia Pacific region? (For the scores in individual markets see tables.) ING Barings slipped from second position last year to third this year, with Jardine Fleming again taking the top spot and Crédit Lyonnais Securities Asia taking second. Jeremy Palmer, chief executive of ING Barings in the region, is resilient but not complacent: “The overall pattern of this survey, and others, is that we are still a top-tier player. Our historic position of nearly total hegemony was never going to last indefinitely,” he says. When fund managers are asked why ING Barings is falling in their estimation, they are generally equivocal. “It is a strong firm, there’s no doubt about it,” says one. But he adds: “I just don’t feel a pressing urgency to call them. I don’t think their product has evolved in the way it might.” At the same time ING Barings’ competitors are getting better as they commit ever greater resources to the region. “I suppose 10 years ago Jardine Fleming and Barings probably employed a quarter of all the analysts in the region,” says another survey respondent. “Now other firms have a much bigger presence and can challenge these two. I think, in a way, Barings has been stuck in what I call the waterfront approach. Their attitude has been: we have this many analysts, in this many centres, covering this many countries, so you must deal with us. I don’t think it can continue to rely on the strength-of-numbers argument any more.” Firms that are busily bolstering their Asian presence include Merrill Lynch, Deutsche Morgan Grenfell and UBS. The pressures of running an Asian securities business are increasing as the stakes are continually raised. Keeping the best staff has become absolutely critical for traditionally strong players as competitors proliferate. High staff turnover Some estimates put staff turnover at Asian brokers at 35% annually. That leaves fund managers dizzy. “The trouble with this region is that as soon as you strike up a relationship with an analyst or salesman, he ups and goes to another firm down the road.” The pool of available talent is so limited that one move can spark a chain reaction. “Recently we lost our banking analyst, so we had to go out and poach an analyst from somewhere else. So, in turn, does that firm, and on and on and on. It’s farcical really, but it’s a fact of life out here,” says a senior executive at a major regional brokerage Different firms are pursuing different strategies to keep key people. Christopher Rampton, managing director of Jardine Fleming Broking, the top-rated firm this year, thinks the local nature of the business is a plus when it comes to attracting and keeping staff. “I think that the staff feel secure that Asia is the home of Jardine Fleming and so recognize we are committed, and will remain so. The strings are pulled locally.” Crédit Lyonnais Securities Asia, placed second in this year’s overall ranking and clearly the emerging force in the region, believes it has an ace up its sleeve. Gary Coull, chairman and chief executive, says: “Our staff turnover is lower than our rivals’ and I think that this is down to the ownership structure of the firm. We are 35% employee-owned. Today, there are 70 staff owners.” Despite the collapse last year, most ING Barings staff have remained. The strains are now showing. A team of eight departed ING Barings for Asset Plus Securities in Thailand last month. Standard Chartered Securities, now owned by Thai Military Bank, is also actively recruiting. Andrew Fraser, Standard Chartered’s boss, is an ex-Barings man who has been recruiting from among former colleagues. Jeremy Palmer, ING Barings’ regional chief executive, says: “Our staff turnover is broadly comparable with our peers. The Thailand team was a particular case because they wanted equity. This is a turbulent industry that is going through a particularly rough time at the moment as new firms set up. It is inevitable that we will be a target.” Tight margin strategies However, the pressures are such that ING Barings is considering giving employees equity participation. “I can’t at this stage say much beyond that this is at the planning stage. Clearly, equity is a tremendous binder,” says Palmer. Jardine Fleming’s Rampton admits that ownership is probably the best way to tie staff to the firm and says although there have been discussions, no decision has been made. But even if a firm has managed to tie its best staff in, turning analytical power into revenues is not easy. Competition inevitably means that commissions are still under downward pressure. “Pressure on commissions is always there, though in my experience it is a bit less savage than last year,” says Crédit Lyonnais Securities Asia’s Coull. “Fortunately, I think fund managers are tending to focus more of their business with a smaller number of brokers. If you can tap into that business you can get bigger volumes.” The concentration of commissions among relatively few players does seem to be a trend. “I think we are concentrating our commissions more as we regularize and become more disciplined about how we choose who we deal with. Now there is a core of, say, six brokers in the region who get 75% of our commissions and we expect a superior service from them. The rest of the commission gets spread very thinly,” says a fund manager with a major UK life company. “We’ve actually been helped in this process by the consolidation among investment banks. Whereas a year ago SG Warburg may have got 15% and SBC 5% of our commission, the combined entity gets 15%. The scraps have tended to go to the smaller local specialists we value for individual market input.” The strategies for coping with tighter margins and concentrating commission vary widely. ING Barings is taking the route US-integrated investment banks favoured in Europe following the UK’s Big Bang and the downward spiral of commissions there: leverage secondary market analysts to win primary markets business and primary markets deal flow to maintain secondary markets expertise and trading in those securities. Palmer at ING Barings says that though agency broking remains profitable, it is prudent to bolster other bits of the business. “Margins are under pressure. The future profitability of this business lies in the diversification of revenues into other areas. Top of that list is corporate finance and primary market work in both equity and debt, and also derivatives. The delivery platform is the agency broking network we have built up in the region. Agency broking is a core business, but there are pressures on the profitability of this business.” The distribution power that an agency broking business creates is also emphasized by Jardine Fleming’s Rampton. Jardine Fleming has been more conspicuously successful in winning primary equity market business in the last few years than other regional players. However, Rampton says the cart should not be put before the horse. “Capital markets, market-making, derivatives, securities lending, all these different pieces of the firm, are ancillary and supplementary to the core agency broking business. The other businesses can only flourish if the core product is making its mark across the region.” Rampton adds that the interface with the fund management community can promote deal flow for the capital markets business. “The feedback we get from clients on companies allows us to say, to suggest, to the capital markets team which vendors may be worth pursuing,” he says. Crédit Lyonnais Securities Asia is taking a different tack to its two main regional rivals. Coull says the firm is pursuing a strategy of being a classic British-style agency broker. “What we want to do is make money by making our clients money.” Coull is convinced that agency broking will remain profitable. Although the firm has been involved in investment banking business, notably in China where it has been the bookrunner in eight privatizations, it has declared an intention of never deriving more than 50% of its revenues from investment banking fees. Smash and grab “I think primary markets business is about making money while the good times last. It’s smash and grab. Agency broking is a more stable long-term business. It’s about nurturing relationships and providing clients with subtle, thought-provoking research. If you can do that you can make money in the good times and the bad. I think a firm like ours is a good counterweight to the investment bank culture,” says Coull. The survey result suggests that is a successful business strategy. Inevitably, fund managers, especially UK-based ones, are suspicious of linkages between corporate finance work and research. “We are generally antipathetic toward the US firms and a little concerned about the direction of some of the British ones,” says a manager with more than $3 billion invested in Asia. “I think fund managers are the third priority for US investment banks. The number-one concern is their proprietary trading book and their second concern is their corporate clients, real or potential.” This is, of course, a well-rehearsed argument. Since it is fund managers that have pushed down commissions for agency broking, they might be accused of trying to have their cake and eat it. Interestingly some fund managers, used to dealing with integrated investment banks in Europe, are becoming rather more sophisticated in how they view these potential conflicts. A director of one of the world’s largest active fund management companies, with more than $9 billion invested in Asian markets, says: “I actually don’t think in terms of conflicts of interest at all. Firms like Merrill Lynch and Jardine Fleming are actually rated more highly by me because of the deal flow that they have. Firstly, by building a relationship, I want to ensure good treatment when good deals come along. Secondly, in an IPO or secondary offering, an investment bank can get that much closer to the top management of a company and better understand what their plans are. If an investment bank can then translate that into first-rate secondary market coverage, everyone wins.” Analyst at the apex The best trick of all for an investment bank is to employ an analyst respected by investors and by the senior management of the companies he covers. That should ensure both primary market deal flow and secondary market commission income. Peter Churchouse, Morgan Stanley Asia’s Hong Kong property analyst, top-rated in this survey for two years running, matches that description. Praise for Churchouse is almost boundless. “Peter Churchouse is unique in his understanding of the Hong Kong property market,” says a fund manager at a major UK house. “There are a handful of people, including Michael Green at Nomura, who comprehensively know and understand what is going on. But only Peter has managed to consistently relate news to stock prices. He stands at the apex talking to the best minds in the fund management world and the top people in the industry. He is the only analyst that the property tycoons take seriously.” Churchouse has certainly fulfilled the traditional role of a research analyst at an agency broking firm: he has made money for his institutional clients. In January 1995 he was telling clients to buy the major Hong Kong developers, arguing that Hong Kong residential property prices were in a cyclical bear market. Most commentators thought the downturn was a secular trend. Companies like Cheung Kong were then trading at HK$21 ($2.71) but have risen as high as HK$60. In September 1995 he started recommending increased weightings in property investment companies like Wharf Holdings, Great Eagle, Hongkong Land and Amoy Properties. Since November the sector has outperformed the market by 9% and Great Eagle’s share price has risen from HK$13 to HK$22. But in addition to making money for his clients, Churchouse has helped make money for Morgan Stanley Asia. There have been three major property deals in Hong Kong this year and Morgan Stanley has been a bookrunner for each of them. In January $522 million was raised in a secondary placement by Walter Kwok’s Sun Hung Kai Properties. Morgan Stanley was the sole bookrunner. Li Ka-Shing’s Cheung Kong raised $686 million in a secondary offer in February, the largest equity placement in Hong Kong since 1993. Morgan Stanley ran joint books with Peregrine Capital, HSBC Investment Bank Asia and Goldman Sachs. Finally, in March, Henderson Land successfully spun off its Chinese interests in an IPO for which Crédit Lyonnais, HSBC Investment Bank Asia and Morgan Stanley ran the books. Investment banks and brokers may puzzle over how best to make money, but the main interest of fund managers remains the quality of research a firm offers. Their needs are evolving. One reason Barings has slipped in the rankings may be the general feeling that the firm has stood still while rivals have developed their research product. Some of the criticism is harsh. “ING Barings’ research is a bit like vanilla ice cream,” says a senior fund manager at a major UK asset management firm. “There’s an awful lot of it about and none of it is very interesting. The franchise seems to depend solely on numbers. The way I manage money in Asia has evolved. Their research product hasn’t.” Unfortunately for ING Barings, the results, in aggregate, supported this individual view. The picture is repeated at the individual-country level. ING Barings was ranked top in five markets last year Indonesia, Korea, Philippines, Singapore and Thailand. This year its only top spot is the Philippines, a thinly-traded market. Jeremy Palmer, chief executive of ING Barings in the Asia Pacific, acknowledges that product development may have been allowed to slip. “We do take on board that the needs of the client base are evolving all the time and it is probably fair to say that in 1995 we may have been distracted from the task of product development. Since the rescue and the inevitable reorganization that ensued, we have been very focused on upgrading what we do. It is the case that as markets become more transparent, it is harder to add value. We are doing that in a number of key markets, though it may take time for the perception to filter through,” says Palmer. One product that has greatly helped Crédit Lyonnais Securities Asia is its Asia Morning Line, an eight-page fax distributed daily to 1,200 institutional clients, covering the entire region. One Boston-based asset manager says: “It’s the best product out there. Peregrine used to have the best fax service but it has been eclipsed by Crédit Lyonnais. It covers all the markets succinctly and includes information on a company visit. I come into work and there, on my desk, I’ve got six good investment ideas.” Saturday morning read The views of fund managers on the utility of regional strategy and economics also seems to be changing. After two years at the top, ING Barings’ Alan Butler-Henderson is edged out by Jim Walker of Crédit Lyonnais. Butler-Henderson does not even make it into the top three, with Crosby’s Manu Bhaskaran taking second place and Jardine Fleming’s Colin Bradbury third. It seems Butler-Henderson’s combative style may be out of favour. “I would say Butler-Henderson falls into the didactic school of strategy which, quite frankly, isn’t very useful. He’s also a bit esoteric for my taste,” says one fund manager. Bradbury and Bhaskaran, on the other hand, are praised for being down to earth. “They all have their weaknesses. Butler-Henderson and Walker are too opinionated, whereas with Bhaskaran it is sometimes hard to tease an investment conclusion from what he is saying.” Says one fund manager: “Butler-Henderson is a Saturday morning read. Thought-provoking, enjoyable, but not always tremendously useful.” Another adds: “Nobody would accuse Jim Walker of being equivocal in his views. But I do feel there is a difference in tone. I don’t feel I am sitting in a church congregation listening to a sermon. I feel there is a dialogue going on.” Sectoral approaches to research are also being re-evaluated by fund managers. For the first time this year, the responses from fund managers asked to rank brokers by their sectoral work are markedly different from the overall best analysts table. This suggests fund managers are beginning to draw distinctions between the overall research product and sectoral work. Merrill Lynch takes the top spot and is praised by fund managers for having developed the most comprehensive sector-based regional research. Sectoral research For those looking to cover Asia on the cheap, sectoral analysis has an obvious appeal. But fund managers are wise to this. “A lot of firms doing sectoral research are doing it to hide their deficiencies in regional coverage. It’s a good deal cheaper to have six heads of sectoral research in Hong Kong covering the region, than analysts in 10 different markets doing fundamental company work,” says one. What differentiates Merrill Lynch, says head of regional research Michael Unsworth, is that it combines the two. “The background to this product is the acquisition of Smith New Court by Merrill Lynch last year. Smith New Court had a good on-the-ground presence in Asian markets. We sat down and decided how best to combine the two firms, and work out a framework for the research product regionally and globally. We have tried to combine the fundamental work of local analysts with a regional sectoral product that links in with the global sectoral work that Merrill Lynch is able to do,” says Unsworth. Fund managers are divided on the usefulness of sectoral work. Simon Nicholson, in charge of Asian investment at London-based Gartmore, one of the UK’s largest money management firms with $72 billion under management, is not convinced. “Sectoral research has a curiosity value, but I don’t act on it. It is still the case that different markets have different valuations. Understanding that is more important.” UK rival, Mercury Asset Management, the largest UK fund manager with $120 billion under management, takes a different view. “Sectoral research is definitely something we pay increasing attention to, particularly when assessing valuation risk. In many markets fund managers end up holding very similar stocks, most notably due to liquidity constraints. That makes spotting market-specific pricing anomalies difficult. But pan-regionally, both within sectors and between sectors, anomalies may emerge,” says Asian fund manager Ewe Cameron Watt. The big question for brokers catering for firms like Mercury is whether commissions will be directed on the basis of sectoral work. This is something fund managers are loathe to discuss. The answer for brokers, as it is for any intermediary, is know your client.
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