Members of Asia’s first association of Independent Research Providers (AsiaIRP) gathered for lunch on Hong Kong’s waterfront yesterday to celebrate the launch of the new industry body.
AsiaIRP is a not-for-profit organisation co-founded by Lucy Carmody and Ed Stockreisser. Its creation represents the first time independent Asian research houses have had an industry body to turn to, as they do already in Europe (EuroIRP) and the US (Investorside).
Carmody sees AsiaIRP as filling an important gap in a region which has become the focus of global capital flows, a changing environment where investors are in need of non-conflicted insights into companies, markets and economies.
“Independent research is a valuable commodity – particularly now,” she says. “Regulators here are still playing catch-up to the rapid expansion of recent decades, leading to significant risks for foreign investors.”
Carmody is quick to outline the difference between independent research and proprietary investment banking research. “If you are researching the same stocks and markets in which another part of your bank is invested or vested, there is an inescapable conflict,” she explains.
AsiaIRP organised two engaging panel sessions at yesterday’s launch to argue the case for independent research.
The first featured Kim Graham, head of Asian sales for Instinet, Daniel Holder, CEO for INX-Securities Asia, and Richard Wallace, CEO of Enzard, who all highlighted the benefits of unbundled services.
“Research is often essentially offered free as part of a bank’s bundled services to their clients,” says Carmody. “There are some excellent investment banking research products out there, but quality has suffered generally since the global financial crisis as resources have been allocated away from proprietary research.”
Stockreisser adds: “There is a growing desire from the buy-side for the kind of quality independent research our members produce. But there is still a general lack of understanding about the commission-sharing agreements (CSAs) necessary to gain access to the research. AsiaIRP will be pushing hard for greater understanding and acceptance of CSAs across the region.”
Commission-sharing agreements allow investors to pay for research and trade execution independently.
“It’s unlikely that a firm is going to be the best at trading and also the best at research,” adds Stockreisser. “The two skills are completely unrelated. So choosing providers of each independently means investors are going to get the best of both worlds.”
The second panel yesterday featured a lively exchange of views (and some fairly gloomy views) on China, Asia and the world between independent economists Simon Ogus, founder and CEO of DSG Asia, Dr Jim Walker, founder and managing director of Asianomics, and Diana Choyleva, director of Lombard Street Research.
Choyleva argues that global imbalances which caused the financial crisis have not yet been worked out and that China’s export- and investment-led model has reached the end of the road.
Walker suggests the world is in a bigger mess now than two years ago, that China has been painted into a corner with a “hugely mal-invested” economy and that the downturn starts now.
Ogus, meanwhile, says that China is not at the peak of a bubble such as Japan in 1989, but is more like Japan in 1970. However, he adds that if China fails to move to a more realistic cost of capital, then the pace required to get from 1970 Japan to 1989 Japan is going to be a lot shorter than 19 years.
Stockreisser revelled in the difference of opinion between the panellists. “If you get three economists on a panel who can actually say ‘I strongly disagree with you’, it’s like hitting the jackpot,” he says.
“Most of these big events have got sales-side economists who don’t express any differences. So to hear a gloomy outlook today I thought was refreshing. You would never get a bank telling you to short equities globally because it would essentially cripple their business.”
AsiaIRP has a total of eight people, including founding partners and founding members who chipped in to get it running. At present it has 15 members and counting.
“The interest is huge,” notes Stockreisser, who has always worked on the business side of research and has spent the past seven years at Lombard. He points out that in 2003 there were 10 independent research providers in Asia, compared with 40 qualified institutional level IRPs today.
“You can see the growth in the region, what with the number of new funds setting up here believing that Asia is the future,” he says. “What is interesting is that a lot of people looked to the banks almost for stewardship and guidance throughout the financial crisis, and I think they felt somewhat let down by what effectively was sell-side research.
“AsiaIRP hopes to be an industry resource where people who are setting up in the region can come and find out who are the best sector analysts, for example, or macro guys.”
The body’s target members are independent research providers that have analysts in Asia, while its target audience is buy-side institutions who it hopes to help realise have a choice. It also aims to attract the attention of regulators to facilitate policy discussion.