It was an evening in 1996 when a fixed-income analyst had drinks with two journalists at Portico, a nondescript hangout for the industry near Central, Hong Kong. “Here’s something we really need,” he said. “A fixed income research poll that would show how we’re faring compared to other research houses, and how we can improve our research. Nothing like this exists in Asia.”
Thus was born the annual FinanceAsia fixed-income research poll.
Our poll revealed a clear top echelon among general quality fixed-income research, with a few other names seizing niche ground. Merrill Lynch, HSBC and Goldman Sachs appear again and again. With over twenty global investment banks in the competition, it is particularly impressive to see Merrill’s 16.12% share of 141 votes for best at Asian fixed-income and credit strategy, with a considerable gap between it and runner-up HSBC at 11.98%.
The Merrill juggernaut rolls on: first place for best in Asian regional macroeconomic research, best research on Asian investment grade credits and best research on Asian sovereign credits. Jason Carley, the team’s director, is clearly doing something right.
Our survey highlights other stars. Goldman Sachs won best research on Asian bank and financial sector credits, with room to spare, taking 14.12% of the vote; Merrill Lynch (them again) took second with 11.07%. Goldmans also ranked second behind Merrill in regional macroeconomic research and was narrowly pipped out of first place for best research on Asian high-yield/distressed credits by Credit Suisse First Boston/Donaldson Lufkin & Jenrette.
HSBC failed to take the blue ribbon in any category but was a consistent threat, taking second for best fixed-income and credit strategy as well as for investment grade credit research, and third for macroeconomic research, bank and financial sector credits and sovereign credits.
The other gold medallist was CSFB/DLJ, with a daringly narrow win for best research on Asian high-yield/distressed credits. CSFB/DLJ also took third place for all-round fixed-income and credit strategy. No doubt this house is positioned to give the other Big Three a serious run for their money next year.
Two names that remain true competitors but failed to win consistent accolades: Morgan Stanley Dean Witter and JP Morgan. The latter, of course, has since been absorbed by Chase Manhattan, which in this year’s poll ran as Chase/Jardine Fleming – known as a regional equities research powerhouse but a second-tier player in debt. With JP Morgan in the fold, this could be a combination to watch next year; JP Morgan took second place on sovereign credit research. Morgan Stanley took third for investment grade credit work.
Conspicuously absent are traditional European names; only London-based HSBC is a player, and even that’s a stretch – the bank’s soul is Asian – while anyone at CSFB makes a point of emphasizing the First Boston lineage. For general fixed income and credit, the real European names trailed: Deutsche took eighth with 5.37%; UBS Warburg tenth. Merrill alone garnered more votes than ING Barings, BNP Paribas, Barclays, Credit Agricole, Credit Lyonnais and SG combined.
This is a stark reminder of how the American bulge bracket firms continue to dominate the investment banking landscape in all its facets. The uninspiring performance of Lehman Brothers also suggests that, at least in the business of global fixed-income research, size may matter.
An interesting name to watch in this regard will be Salomon Smith Barney/Citibank, which certainly does not lack for size or reach, but clearly has an uphill battle. It received enough attention – fifth in terms of bank and financial sector credits, high-yield/distressed credits and sovereigns – that demonstrates a springboard to reach loftier heights next year. Meanwhile Ivan Lee and So-Yon Sohn garnered the most votes as a duo.
What, exactly, have the superlative firms done? Fund managers were asked, “What are the characteristics of superb fixed-income research that would help you in your investment decisions?” Some of the more interesting answers were:
- “Strong views, clear recommendations on investment actions, leading guideposts to an exit or re-entry strategy, good valuation work.”
- “Overview of where regional spreads are headed versus their emerging market counterparts, calls on political outlooks, discussion of ongoing possible solutions to macroeconomic problems and eventual impacts on sovereign credits.”
- “Detailed analysis; not a rehash of what we read in the papers.”
- “Analysis that clearly spells out factors that would trigger deterioration of the creditworthiness of the issuer.”
- “Clear, concise expression of opinion; interpreting and converting facts into actionable investment ideas as opposed to simply regurgitating facts.”
- “Think outside the box.”
Also common were comments about the need for independent analysis; you can sense some investor frustration from the following wishes:
- “I want impartial research supported by data.”
- “A complete lack of ties to any institution investing in any financial instruments anywhere in the world.” (Probably not one of Merrill’s boosters, this one.)
- “Clear analysis, asking interesting questions, providing thoughtful answers and not motivated by trading desk positions or sales axes.”
- “Objectivity.”
- “Does not talk their book; not afraid to turn negative.”
- “Bold and independent.”
Just over half the respondents say fixed-income analysis is independent (48.96%) or very independent (6.51%). This is not a very encouraging vote. A fifth of fund managers say research is tainted, and a similar number waver when asked about this. The good news is there’s room for improvement. And only 3% say the research is categorically “not at all independent”. Still, this seems an area where securities firms have an image problem.
A quick vote on favourite credit rating agencies reveals a clear dichotomy between the players and the pretenders. Moody’s Investors Service and Standard & Poor’s split the vote, leaving Fitch with a very difficult job. The reigning titans this year came out even; it will be interesting to see whether one can generate a lead by next year.
Technology is always a hot topic, and fund managers are responding eagerly to the proliferation of online bond portals. Over 60% say they are likely or very likely to use portals next year, with less than 15% expressing a lack of interest. Furthermore, nearly 80% of fund managers are using e-mail or internet sites to receive or download analyst research. An astoundingly low 23% prefer getting research by mail; with the speed of trades and information flows in today’s market, these must either be buy-and-hold investors – or somebody’s eating their lunch.
While our survey demonstrates the importance of information technology, we must again turn to individual comments for a more elegant understanding of what fund managers think. We asked, “What do you think will be the impact of widespread web-based bond-trading platforms on the provisions of credit research by fixed-income houses?”
By no means did we discern consensus. Some investors see it leading to a broader investor base:
- “Should lead to increased requirement of credit research from a large number of individual and SME investors.”
- “Another distribution mechanism that will mean greater access for non-institutional investors.”
- “This will provide access to corporations, especially those in the non-financial sector, to take advantage of such opportunities provided through web-based trading platforms.”
- “Will add some liquidity.”
- “Positive as this will enhance volumes.”
Other investors voiced either optimism or concern about how such platforms would affect the quality of research:
- “More frequent updates and better coverage.”
- “Responsive and interactive.”
- “The fixed-income houses need to issue reports on a more timely basis; quick response to events (less than three hours).”
- “The spread of web-based bond trading platforms will make the provisions of credit research by fixed-income houses more crucial as the first to receive any news of changes in the credit ratings will determine the bond’s marketability.”
- “It will become more prolific and be of poorer quality, with fewer analysts asking the hard questions, much less answering them, and more rehash of the basic information and ratio analysis of main financial figures.”
- “Research will become brief and details online only on request.”
- “Houses will provide it as a quid quo pro for business given rather than for free.”
- “Big firms won’t give it away, despite their participation. There will be some differentiation according to client importance.”
Quite a few respondents were not impressed by the whole online thing:
- “Minimal impact. Liquidity is key and I am sceptical about the ability of online trading platforms to provide that degree of do-ability.”
- “No real impact.”
- “Already receive access to research websites; don’t see great change.”
- “Trades will get done more on execution levels rather than research.”
- “Another bubble.”
- “I prefer phone dealing.”
- “This will always have the agenda of the underwriters. It is better if credit research is left among established credit rating agencies.”
- “Still would prefer a more personalized approach and verbal advices.”
Despite the above, other fund managers see a shift in how fixed-income houses operate in the making:
- “Clients will go directly to the website for research, which limits the need to contact bond salesmen.”
- “The credit research analyst would increasingly replace the role of salesperson.”
The holiday season is nearly here; be nice to your bond salespeople, they may be feeling down this year.
FinanceAsia would like to thank everyone who participated in our survey. A solid 44% of you are in Hong Kong and 18% in Singapore, and another 15% in either the United States or United Kingdom, with the remainder based across the Asia-Pacific region. There were 141 votes in total. Click here for full results. FA
