Niche grows in re­search

More com­pa­nies in­vest­ing in own an­a­lyst

The Star Malaysia - StarBiz - - Foreign News -

LONDON: In the in­cred­i­ble shrink­ing world of bro­ker­age re­search, one niche is hold­ing up: the one where com­pa­nies pay di­rectly for an­a­lyst com­men­tary.

Dis­miss­ing con­flict of in­ter­est con­cerns, even global in­sti­tu­tions like Ex­ane BNP Paribas are ex­pand­ing a ser­vice that charges firms to be an­a­lysed. That turns the tra­di­tional model, where trad­ing cus­tomers un­der­write the ser­vice, on its head.

With de­mand grow­ing, the pur­vey­ors of what’s known as “spon­sored re­search” re­ject crit­ics who say they’re do­ing lit­tle more than sell­ing ad­ver­tis­ing. In their view, com­pa­nies fund­ing an­a­lysts is no worse than the prac­tice that has de­scended through the decades in eq­uity re­search and is rou­tine for credit-rating firms.

“A reader of the re­search will know that this is a con­trac­tual obli­ga­tion be­tween com­pany and the re­search provider and there’s a flat fee and it’s com­pletely trans­par­ent,” said Neil Shah, di­rec­tor of re­search at Lon­don­based Edi­son Group, which has 50 an­a­lysts who pro­duce about 40 re­ports a week.

“Whereas you have no idea about the money be­ing gen­er­ated be­hind a re­search note; po­ten­tially there’s a bank­ing trans­ac­tion be­hind it.”

The boom­let has been driven by smaller com­pa­nies that are typ­i­cally ig­nored by sell­side an­a­lysts and yet face an ur­gent need to reach in­vestors. It’s fall­out from the 2018 Euro­pean Union rules that sep­a­rate re­search costs from trad­ing fees. Such “un­bundling” re­moved an in­cen­tive for an­a­lysts to pro­duce re­search on smaller stocks.

Recog­nis­ing the im­pact, the EU has be­gun plan­ning to roll back those reg­u­la­tions that were man­dated by the Mar­kets in Fi­nan­cial In­stru­ments Di­rec­tive II for com­pa­nies with a mar­ket value of less than 1 bil­lion eu­ros (Us$1.2bil).

“It’s too lit­tle and too late,” said An­drea Vis­mara, chief ex­ec­u­tive of­fi­cer of Italy’s Equita Group, which of­fers both spon­sored and tra­di­tional re­search. “I strongly doubt that re­mov­ing un­bundling for smaller com­pa­nies will have any mean­ing­ful im­pact.”

That’s why firms like Edi­son Group, which has 400 clients pay­ing for their own re­search, ex­pect the good times keep rolling. While this year should be flat, the busi­ness has been grow­ing about 10% an­nu­ally, ac­cord­ing to Shah.

Like­wise, Bryan, Garnier & Co is hir­ing health­care an­a­lysts, who work on both tra­di­tional and com­pany-spon­sored re­search. Skan­di­naviska En­skilda Banken AB, or SEB, now has about 60 an­a­lysts who do both and has added about 20 com­pa­nies to its spon­sored re­search cov­er­age since 2018. Ke­pler Cheuvreux, a French bro­ker­age, has in­creased the num­ber of such clients to 125 from 60 at the start of 2018.

Data from French mar­ket reg­u­la­tor AMF, which tracks the sec­tor, showed 368 spon­sored-re­search con­tracts in France as of June 2019, up 27% in two years.

About 80% of French com­pa­nies with a mar­ket value be­low 500 mil­lion eu­ros paid for fi­nan­cial re­search last year, com­pared with 60% in 2018, ac­cord­ing to a sur­vey by Cliff, the French in­vestor-re­la­tions so­ci­ety.

It’s “a good op­por­tu­nity for us to high­light small, higher-qual­ity com­pa­nies that are not vis­i­ble in the mar­kets”, said Paul Sch­nei­der, deputy head of re­search at Ex­ane BNP Paribas, which plans to soon roll out the ser­vice. At the same time, it’s “very im­por­tant to have a sep­a­rate, clearly iden­ti­fi­able prod­uct that’ll help in­vestors nav­i­gate what’s spon­sored re­search and what isn’t”.

Take Bryan, Garnier’s dis­claimer: Spon­sored re­search rep­re­sents “mar­ket­ing com­mu­ni­ca­tion”, where an­a­lysts might “have re­spon­si­bil­i­ties to those com­pa­nies which could con­flict with the in­ter­ests of the clients who re­ceive the re­search”.

Chris Dyer, di­rec­tor of global eq­uity at Ea­ton Vance Corp, a US mu­tual fund com­pany with about Us$500bil un­der man­age­ment, might be one of those clients. “We would be scep­ti­cal of com­pany-spon­sored re­search,” he said. “It would be hard to ar­gue that the re­search would be truly in­de­pen­dent and un­bi­ased.”

Laura Janssens, head of Euro­pean eq­ui­ties at Beren­berg Bank, one of Europe’s big­gest mid-cap bro­kers, said she avoids do­ing com­mis­sioned re­search be­cause it un­der­mines an­a­lyst in­de­pen­dence. The Ham­burg-based firm has ex­panded the num­ber of small and mid-cap stocks it cov­ers – in the clas­si­cal way – to about 500 since MIFID II’S in­tro­duc­tion as some smaller bro­kers ex­ited the mar­ket.

Against such doubts, the spon­sored re­search firms stand by their work, point­ing to the bond mar­ket, where Moody’s In­vestors Ser­vice, Fitch Rat­ings Inc and S&P Global Rat­ings are paid by the com­pa­nies for their credit rat­ings.

While spon­sored-re­search re­ports gen­er­ally es­chew rec­om­men­da­tions to buy or sell, both SEB and Bryan, Garnier said there’s no dif­fer­ence in the work that their an­a­lysts pro­duce on com­pa­nies that pay for the analysis and those that don’t.

“It’s very im­por­tant that we don’t sep­a­rate the two prod­ucts,” said Nick­las Fharm, head of cor­po­rate re­search at SEB. “For us, ev­ery­thing is just re­search.”

Edi­son’s re­cent spon­sored re­search notes on such com­pa­nies as Al­lied Minds Plc, Hel­lenic Petroleum SA and SUDA Phar­ma­ceu­ti­cals Ltd, have dis­claimers on the first page and up­beat ti­tles like “A flex­i­ble re­finer in a tur­bu­lent time” and “Im­prov­ing delivery of ex­ist­ing drug prod­ucts”.

The notes are free on Edi­son’s web­site as well as on its Linkedin page and Edi­son charges its clients about £50,000 (US$65,000) a year for re­search.

Not all the notes are rosy. While Edi­son says that the pri­vate eq­uity firm Al­lied Minds is trad­ing at a 62% dis­count to its net as­set value, it also cut Hel­lenic Petroleum’s val­u­a­tion by 5% in June to re­flect lower global oil de­mand and in­dus­try chal­lenges.

Josina Kamer­ling, head of reg­u­la­tory outreach for CFA In­sti­tute for the Europe, Mid­dle East, and Africa re­gion, is con­cerned that some in­vestors may not be able to tell the dif­fer­ence be­tween spon­sored and tra­di­tional re­search.

“Who is go­ing to pay for in­de­pen­dent and high-qual­ity re­search if you have free is­suer-spon­sored re­search flood­ing the mar­ket,” she said. “You re­ally need to be re­ally ex­pe­ri­enced to recog­nise it for what it is.” — Bloomberg

“Whereas you have no idea about the money be­ing gen­er­ated be­hind a re­search note; po­ten­tially there’s a bank­ing trans­ac­tion be­hind it.” Neil Shah

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