FinanceAsia: You have had an overhaul of your research business recently. What's been done?
Pietersz: As of February this year, we've moved to a bottom up only research format and away from the macro format, which was too all-encompassing. Now we have a company specific research model, which requires a lower resource base but gives a more focused product.
We felt that investors want good analytical corporate research, something that has been a rarity in the market. So now we cover between 300 and 350 stocks, about half of the 700 plus stocks we were covering in 2001. The sectors these companies are in are technology, telecoms, utilities, media, small cap and consumer, banks and biotechnology & healthcare.
How did you choose which companies to continue covering and which to stop covering? Was it due to which companies you had corporate finance relationships with?
Our primary focus is to cover those stocks that best serve the investors who are our clients. It's a secondary driven model, not a model driven by corporate finance, for which SG is not that well known in Asia. We wanted a balance between MSCI blue chip companies and mid-caps, which could be the next rising stars of corporate Asia. We're also doing new lines of research format. We now produce company research notes through two products, Fundamental Issues and Current Issues. Fundamental Issues offers an in depth look at the company, its financials, its market position, its management etc. Current Issues is a supporting research document dedicated to update on developments and offer new ideas.
Was this reform driven by the scrutiny that research houses are undergoing in the US and Europe?
No this was driven out of Asia. The prevalent research model has been to try to be all things to all people. This meant providing vast coverage with top down economics. This required a huge cost base that became unsustainable especially with the declining levels of commission in the secondary markets.
However, what we have done is timely as the Spitzer issues highlight the validity of what we have done. Because we do not have corporate finance entanglements with blue chips, we can be very objective in our research and come up with good calls for our clients, who are the investors.
What percentage of your stocks do you recommend as buys?
In the US market as a whole, the ratio is about 99%. In Asia, it's definitely a more balanced percentage.
Do you think the Asia research world is going to change a lot?
There is not the same degree of urgency for change in Asia as there is in the US and Europe. This is because Asia did not go through the bubble period that the US and European markets went through so there's much less to deflate. However, because of the market power of the US investment banks, the changes that they make to their research businesses will be extended across the globe. The inverse of this is that there is an increased danger of rash moves being taken by the US SEC, which are then forced on to everywhere else.
Does this concern you?
The main concern I have is that given the extent of the legal outcry, there could be so many new checks put on analysts that it will actually reduce the ability of the analyst to be objective and to be able to call his own shots.
You said that Asia had not had a stock bubble in the last few years, which saved it from having too much cheerleading research. However, Asia did have a bubble five years ago and then, when the crisis broke, it must have affected the analyst community a lot.
The levels of corporate disclosure have improved a lot since the crisis. Companies have been forced to do it as the authorities have become much more stringent and corporate governance has become more important. For instance, the levels of disclosure given out by Thai banks pre 1997 and post 1997 are like chalk and cheese. Now you get a 200-page report every quarter. It is an amazing change.
However, analysts in Asia have also become much more sophisticated since the crisis, especially in the ways they look at companies. Now most analysts are doing exercises such as peer analysis and supplier analysis, which they were not doing before. Also the number of analysts with professional qualifications has risen dramatically over the last five years. For instance at SG the number of analysts who hold CFAs has gone up quite substantially since 1997.
Do you think analysts can be paid purely on the quality of the work they produce?
Pay depends on the model a bank runs. We are a secondary-driven house and therefore we can operate in the confines of a purely secondary model. For the others I think it's quite likely that we will see a divorce between corporate finance and research activities. And if that happens it will be very hard for banks to maintain the cost base they have on the research side.
The logical end to this trend is for all research to be produced on a pay as you go system. However, I don't think it will get to that extreme as institutional investors do realize the value there is in getting free research. However, I think there will always be a profitable niche for brokers who produce good and objective research.
Will the regulators get more involved in Asia research?
I have not yet seen any increase in regulatory scrutiny of research in Asia, but I have no doubt that it is only just around the corner. The message from Korea for instance is loud and clear [where the regulators investigated UBS Warburg after one of its analysts put out a sell report on Samsung Electronics], and it seems obvious that there will be more scrutiny in the future, not just in Korea but in most other markets as well.
