Asian broker survey: Best overall in Asia
Asian broker survey: Best equity research by country
Asian broker survey: Best equity execution by country
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Asian broker survey: Methodology
These are tough times for Asian brokers. A case in point is Crédit Lyonnais Securities Asia, the highly rated regional broker that cut senior management’s salaries by 20% this year. “The highest paid took the biggest cut, while the lowest paid got a 1% cut,” says the firm’s director of research, Edmund Bradley.
The local firms are having a tough time of it. Indosuez WI Carr cut 10% of its workforce going into 1998 in order to offer “a leaner, client-focused approach to Asian equities” and the most heavily staffed firm, Jardine Fleming, has been quietly trimming too.
The plunge of Asia’s 15 regional stock markets helped contribute to one of the worst numbers in Jardine Fleming’s history, a profit of only $19 million. Nor does it look as if things are about to improve. As Hong Kong-based broking head Christopher Rampton puts it: “This year is very much about enhancing the franchise rather than enhanced earnings per share. One has to tough it out.”
Of course, Jardine Fleming has seen both good and bad times since its beginnings in 1970. And one piece of good news is that its market share is increasing, in part because the heavily overbroked Asian markets are getting less overbroked by the day. Deutsche Morgan Grenfell has shut many of its local offices; the old BZW empire has been dismantled; Schroders and JP Morgan have exited; and new entrants such as Caspian have gone too.
More significantly, Peregrine is gone, and in markets where it was strong – China, in particular – this has benefited such firms as Crédit Lyonnais Securities, JF and ABN Amro. “It’s been positive for everyone,” says Bradley at Crédit Lyonnais Securities. “It’s freed up some market share.”
The downside of the Peregrine bankruptcy is that large US fund managers are making noises about counterparty risk again. One broker says: “Some big US fund managers have been told by their internal credit people that they are not allowed to use certain firms.”
The chief beneficiary of this is AA rated Merrill Lynch, which has long been threatening to dominate Asian broking. “Counterparty risks have become more significant of late,” says Merrill’s Asian equities head, Check Low, “and that is working in our favour.”
Merrill, which has some 400 people brokering Asia, has steadily built a region-wide operation, in part through acquiring teams from locals – notably from JF in the Philippines and from ING Barings in Taiwan. The purchase of Smith New Court in 1995 gave it a strong presence in Singapore and Hong Kong and its purchase of 51% of Phatra Securities in Thailand will make it a market leader there too.
Merrill is also benefiting from the ever-increasing importance of US fund managers in Asia. On average they have been underweight in Asia, but they have become more aggressive – particularly the specialist firms, such as the recovery funds. Jardine Fleming produced a report in July that broke down the recent behaviour of its investor base – and concluded that only its US clients were net buyers of Asia over the first half of the year.
Asian fund managers, on the other hand, are reported – on average – to have switched around 25% of their portfolios into cash. As a result, Asian funds are becoming less important compared with those from the US and the UK: one broker recently took the decision not to bother with an Asian conference and spent the money visiting US clients in New York with a couple of Asian corporates in tow.
With bottom lines looking bleak, such harsh trade-offs are becoming a fact of life for the normally free-spending brokers of Asia. Volumes have plummeted. Take Hong Kong, where daily trading volumes peaked last June at HK$60 billion ($7.7 billion), and now average HK$5 billion. On some days they go as low as HK$3 billion. Today’s average is half what most brokers estimate to be profitable. It’s the same story region-wide.
As if that weren’t bad enough, trends in the industry are making matters worse. The buy side’s switch to centralized dealing desks and dramatically shorter broker lists are chief among the headaches.
The idea behind centralized dealing is to cut costs and free up fund managers’ time to make decisions about stocks rather than worry about how well individual trades are executed. The concentration of trading in the hands of one specialist trader also means better execution is achieved because of volume discounts.
From the Asian broker’s perspective this has been a major break with the past. Salespeople can no longer rely on a few good lunches in the Jackson Room with individual fund managers to write tickets since the fund managers no longer have the power to decide who a trade will be done with. It has also led to increasingly complex voting systems at the asset-management firms to decide which firms will constitute this tightening bunch.
They’ve got a little list
On average the top three on the broker list get 60% of that client’s business. The next four get a further 30%. If you are not one of those seven you can’t make enough money from that client to make it worthwhile covering it. But it’s difficult to get on the list.
The individual fund managers vote every quarter on which firms are giving the best service. Before its acquisition by Invesco, LGT Asset Management developed a complex voting system which brokers had to undergo to get on a client’s list.
LGT’s system involved fund managers voting on each of the analysts and on each stock they covered. The analyst at the broker would be awarded one of five ratings: gold, silver, bronze, tin plate or wooden spoon. LGT’s own stock analysts would then vote for the top five analysts covering each of the stocks they themselves looked at. A separate grading was given for whether phone contact was regular or irregular. A report would then be compiled for each brokerage, breaking down each of their analysts’ performances, and indicating where the firm ranked compared with its competition. If good enough it got an allocation. If, for example, its allocation is 15% it knows that in that quarter it can budget for getting 15% of that client’s trading volume through the centralized dealer. “I’ve got a résumé on my desk,” says one research head, “where the analyst actually includes his LGT rating.”
The pressure on local firms to adapt is intensifying. “You have to create information systems, for example, to track analysts’ calls to individual clients and figure out who they are talking to at the fund manager.” All of this is resource-hungry, and he says the “smokestack firms” that refuse to change will die.
Job descriptions are evolving too. Indosuez WI Carr head of research Simon Maughan draws an analogy with ad agencies – sales people are becoming like account managers. Their job is less to write tickets than to keep the 15 or so people that vote in the large fund-management firms happy. They have to make sure they’re being serviced properly, and find out what they need. This involves copious e-mailing to make sure clients get the right research at the right time. This is not the only reason for the electronic revolution. “One of our sales guys says he spends half his time writing e-mails,” says Maughan, “Voicemail has removed voice contact.” Fund managers are notoriously picky about returning voicemails. But they’re more likely to look at an e-mail and respond to it on its merits.
Salesmen who know EVA
Research analysts, says Maughan, are more responsible today for marketing their own products than in the past. “Increasingly they are the only ones in the firm that understand their own research,” says Maughan. “A salesman that covers four or five countries can’t be expected to understand the latest economic value added [EVA] concept for valuation. So the researcher sells his own research and rings up clients directly to explain it to them.”
The voting system is eroding the value of the saleman’s relationships and increasing the relative importance of research. Research is being viewed less as a cost centre than – if done properly – a tangible way of winning votes and getting on the list.
The pressure on the local firms intensifies further when US fund managers take the list concept further. According to a broker, one US asset manager, plans to cut its list still further. It will have three “global” firms – for example, Merrill, Goldman Sachs and Warburg Dillon Read – and one local per geographic area. That means the likes of WI Carr, JF and Crédit Lyonnais will have to fight it out for just one place in Asia. Once, all three might have been on the list. All of this points in one direction: fewer, but better, locals.
The global firms continue to bite away at local firms’ franchises armed with innovative new ideas and bigger balance sheets. CSFB, which took control of some of BZW’s offices, is starting to make its presence felt with a 75-strong research team – only 10 fewer than Crédit Lyonnais Securities has – and Salomon Smith Barney looks to be in the early stages of replicating the Merrill blitzkrieg.
The global firms bring innovation in derivatives locals find hard to match. They are also the source of new and ever more complex valuation ideas. CSFB, for example, is particularly proud of its EVA model, which enables clients to input their own assumptions.
“The pendulum was already swinging in favour of the global firms,” says CSFB’s head of equities, John Wright. “Smaller regional firms have been under pressure. The present situation will make it harder for them.”
This year’s poll reflects some of the changes. Big established firms such as JF and Crédit Lyonnais Securities still dominate. But the US investment banks are gaining ground, Merrill in particular. Others wait like barbarians at the gate, gaining momentum. “We’re just outside the top 10 if you view it by surveys or market share,” says Wright of CSFB which began its Asian equities drive in 1996, “In the next set of polls I suspect we’ll move into the top 10.”
Crédit Lyonnais Securities continues to distinguish itself by its research – and the cartoons on the covers of its reports. Its chief economist, Jim Walker, was one of the few people – along with MIT economist Paul Krugman – to highlight the possibility of an Asian meltdown at a time when many of his readers would rather have been presented with optimistic reports.
JF remains strong and retains a strong franchise in Asia, if only because it has been there longest. HSBC has started to make an appearance, but basically continues to puzzle. As one rival puts it: “With the bank’s relationships and their regional franchise it is a miracle for all of us that HSBC is not number one.” In one category – Korean execution – it tops our poll and this is largely because of the skills of Korean boss Herman Chung.
In such bleak times, a decent poll performance is welcome, but it can’t mask the fact that hardly anyone is making money. Says one broker: “I don’t think any of our rivals can be making any money, although obviously we’re profitable because we run such a tight ship.”
