A new boutique equities research house, Japaninvest, has begun targeting non-Japanese institutional investors in Japan and Asia for its independent services. The firm's Tokyo-based co-founder and managing partner, Rupert Eastwood, says the market downturn and the fallout of research-related scandals in the United States have created a unique opportunity to launch a new firm dedicated to Japanese research. Japaninvest began regional sales after bringing Chika Masuzawa on board from Mizuho Securities; she reports to Mark Burges Watson, the London-based principal sales partner.
Hedge funds in Europe have made up a large portion of buy-side clients so far, although Eastwood expects more long-only houses to come on board as they work through their voter processes for choosing research providers.
Dotcom excesses in the US have led global investment banks to de-emphasise research and distance it from investment-banking revenues. The smartest analysts have often moved to M&A or capital markets to maintain their salaries, while analyst and research salespeople have seen their salaries cut or their jobs obliterated. The result has been a choice selection of people on the market, and lower quality research from the big houses, argues Eastwood.
At the same time, more execution-only brokers such as Instinet have set up shop in Japan over the past few years. Lacking a research or securities arm, these brokers make good matches for an independent research house that doesn't want to trade. Such partnerships also spare firms like Japaninvest from investing in the costly securities licence to receive and execute orders, or building the capital necessary to meet big fund managers' counterparty risk requirements.
Japaninvest's preferred execution broker is Instinet, although this is not exclusive. Buy side clients are asked to tell the executor that the trade idea came from Japaninvest, so that the two may share the commission. Japaninvest does not take soft-dollar commissions.
Eastwood was director of origination and later head of M&A execution at Jardine Fleming in Hong Kong in the late 1990s. Since 1999 he has advised and invested in small-growth companies in the region. He and Burges Watson opened Japaninvest in March, with research in Japan and three salespeople in London, but have only recently initiated sales in Japan and Asia. Next year, Eastwood intends to hire a financial analyst and a second tech analyst, and one or two more salespeople. He is also exploring opening a sales desk in the United States.
Japaninvest is not targeting Japanese investors. For one thing, the fees are less. Also, there is less competition selling Japanese research ideas to foreign firms, and Japaninvest's salespeople are bilingual, important for the many foreign analysts in Tokyo. US and European-based investors seeking access to Japanese sell-side analysts are often frustrated, even at foreign firms, because Japanese brokers are focused on serving only local institutions, which vote in Nikkei rankings that make and break analysts.
Eastwood says so far the firm hasn't had any more trouble accessing local companies than other global firms. "And the mid-sized companies are happy to see us," he says."
Japaninvest is the first management-owned independent research firm to specialize in Japanese equities, although KBC Securities, ING and CLSA bill themselves as relatively independent. There are a number of "one-man bands" in Japan providing economic and investment advice, but without a sales desk, they face an uphill battle, Eastwood maintains. He acknowledges a specialist such as Japaninvest is not about to knock off any of the big foreign players, but can be more efficient, cover mid-cap stocks better, and provide better service. It lacks the one-stop shop power of bigger houses; Japaninvest can't bring investors access to IPOs or other deals. But Eastwood says it was covering global fixed costs by the end of the first quarter. "Given our size, we just need a few crumbs and we can be more profitable than the big boys," he says.