Asian institutional investors are prioritising sell-side research and advisory over execution services in volatile markets, while also cutting back their number of sell-side relationships, according a new report from consultancy Greenwich Associates.
The firm’s ‘Asian Equity Investors Study’ revealed that, among the largest trading institutions in Asia, the average number of sell-side relationships fell to 20.5 in 2008, from 24.5 in 2007.
The research also noted that a sharp decline in portfolio values and stock prices had shrunk the pool of institutions’ equity brokerage commission payments. Within these diminished pools, the proportion allocated to research, sales coverage and advisory services jumped 11 percentage points in 2008, to 66%, according to the study. This came at the expense of trading coverage and agency execution, which now accounts for to 26% of total commissions, down from one-third a year ago.
“The reversal of this trend does not mean there is less desire for superior execution, but rather that, in times of unprecedented market turmoil, the need for timely insights and access is even greater and the opportunity cost of not securing them is not something that investors want to risk,” said John Feng, consultant, Greenwich Associates.
Greenwich said that the reduction in sell-side relationships was caused by more cautious buy-side attitudes, prompted in part by counterparty risk issues stemming from the collapse of Bear Stearns and a retreat back to familiar markets instead of expanding investment operations. The firm also cited an increase in the use of commission sharing agreements (CSA) in the region. Two-thirds of institutions said they planned to use CSAs within 12 months and 40% reported using CSA services in 2008.
“Our research in Europe and the United States suggests that once institutions establish CSAs, they gradually begin winnowing down the number of executing brokers they use and transitioning other sell-side firms to payments from CSA commissions,” said Greenwich Associates consultant Jay Bennett. “It appears this process has begun in Asia.”
The study stated that the drop in resources available to buy-side firms for investment, analysis and administration could leave them increasingly dependent on fewer brokers for data, insights and access to company management. “Covering all of Asia’s equity markets is a complex and expensive proposition,” said Feng. “Even during the boom years — when resources were plentiful — many institutions viewed it as more efficient to outsource some aspects of the research function to the sell-side.”
The research also ranked Asian equity brokers, based on investor responses, placing CLSA highest in terms of equity market share and quality of equity research, with Morgan Stanley also having a significant market share. Credit Suisse was also highlighted for its electronic trading services in the region.