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I am pretty certain that most investors think that equity research in general is pretty useless. Well, let's find out why.1) Size - Owing to the nature of the beast, they service institutional funds primarily. That being the case, they can only look at stocks that clients will buy, hold or sell. This means that at the barest minimum, they can only justify looking at stocks with market caps in excess of $100m (RM350m). That being the case, you can whack out more than two thirds of the stocks on the Bursa. (On a side note, thats also why, it does not really matter whether you have 1,100 listed companies or 1,500 listed companies... Bursa please take note, you are fighting the wrong battle if you concern yourself with that. It is more important to try to double or triple the number of companies with market caps above RM500m). Because of the population sampling, the majority of stocks will not get covered.2) Same Old, Same Old - This literally means that established research houses will be looking at just 30-40 stocks tops. Thats all they have to do. That is also why we roll our eyes when we get another Maybank research, or another Genting research, or another TM research, etc... Too much coverage on the few and not enough on the rest. Its also funny and a bit nonsensical when we get to read 2 sells, 4 neutrals, 1 buy, 2 downgrades and 1 take profit ratings on the same ONE STOCK. Cbmf, its either just a buy or a sell, anything else is covering your ass!!!3) Volume Stocks - Now that we have had a mild bull run for the last few weeks, the top volume stocks have been rather more hectic and vibrant. Just have a look at the top 10 or top 20, these are turning over millions of shares every day. These are the shares that smart and not so smart traders and punters are putting their hard earned money into.... right after arguing till their face is red to get the vegetable seller to reduce 20 cents for the kailan!!! How many of those stocks even have a decent research report??? Maybe one-third... which is to say 99% of the traders, investors and speculators are literally buying and selling BLIND on those top volume stocks. Hence it is natural why so many investors completely disregard the equity research reports as it will NOT help them to make money.4) CBRS - A good idea to start with but has now been abused like a child by a group of pedophiles. Now CBRS is being used primarily by brokerage research to subsidise their operations, while churning out pathetic one two pagers to satisfy the requirements, these research staffers are then asked to spend most of their time doing "other tasks" unrelated to CBRS. The problem stems from the fact that the brokers will use the "fees" to hire cheaply, i.e. fresh graduates... dey, how to have good research from a newbie who is unsupervised??!! The second issue about CBRS is they lack a gatekeeper, you need a taskmaster who will vet, review all research submission... and the need to review their fucking spreadsheets (I suspect the majority of those reports have no spreadsheets). Even a CFA Level 1 failure can write a better research report than the majority on the CBRS. If you don't believe me, go and read a few, I have read most of the crap and its pathetic.5) Beta Neutral - Equity research is generally on more established companies, which means they are likely to be beta neutral stocks, i.e. moving up and down in line with the index. This also means that in a bull run, their stock picks will under perform substantially. But in the recent market crash for most of last year, they also crashed spectacularly, it didn't matter whether you holding Genting or Howah Genting!!! They will never pick Talam, MK Land, SAAG etc... the best we can hope for is their TIMING ON SECTOR plays, to me thats how I use equity research to match my signals and readings on the markets. The rest are basically very expensive toilet paper!p/s photos: Mandy Lieu
(Please note that this letter was published in The Edge 2Q2004)
Putting aside the exchange rate control for the ringgit – the Malaysian equity market is quite open. In our Financial Masterplan to further expand and liberalise our financial markets, an important aspect has not been touched upon much, and that is equity research. If we aim to make the Malaysian bourse into one that has truly international best-practice, we need to address this issue.
Research has always been seen as a cost. No one is willing to put funds into it unless it can yield significant benefits. The universal broker concept has reduced the number of broking firms in the country significantly. How many have a viable research department? How many listed companies are actually covered? Most research units cover 20-30 of the Main Board stocks, and even then only the big ones usually. Added to that, they may cover a smattering of 10-20 stocks for various reasons. That is out of over 1,000 stocks that is listed. If we look at the Top 20 traded volume stocks on a daily basis - how many of those companies can we locate a decent research report? At most 5-6. This means investors are pouring funds into companies that they have very little information.
Lack of research allows syndicates and operators to move stocks with little fundamental justification. The issue of buyers beware do not apply here – if you keep people walking around and never giving them shoes in the first place, they won’t know that they are even barefooted. A little speculation is necessary for any healthy equity market, but if we are to modernize and progress, we need to reduce the “cowboy” image. Currently, investors may get financial data from websites and newspapers, but its mostly historical – we need to have industry outlook, each company’s performance variables and exposure, an assessment of management’s expertise, its relative valuation within the same industry, etc. That is why The Edge (and other similar publications) is not a luxury item but a necessity for all investors – at least The Edge will do a brief research piece on the smaller companies, even then, we would only have so-called-research articles on maybe 200 companies tops. Research houses will do reports on companies that matters – this means large caps as foreign funds only look at those. They may do some medium sized companies to pacify local funds. They may also do some companies if they are growth stocks. So no one will do “poorly performing companies” – cannot sell them, funds won’t buy them, and funds do not even own them in the first place… but they figure prominently in the Top 20 stocks traded daily.
Do individual investors deserve to be scalded because they know no better? Do individual investors deserve to get burned because of that? If the authorities do nothing, we are basically saying that it is okay to move stocks up and down as you like with no fundamental justification, and if small investors get hurt along the way, well its collateral damage!!?? If they have information in the first place, then at least they can decide to go in or not with their eyes open – and if they lose their shirt, well it’s the risk they took. Give them at least some "defence" when entering the markets. When there is little or no information available – the smaller investors do not stand a chance – the best source of credible information they can get is by “Have you heard…?”
Some suggestions on how to improve the situation:
1) Newspapers’ business section editors to put more emphasis on reporting on Top 20 volume stocks.
2) A percentage of revenue for all broking houses to be spent on equity research. Details will have to be worked out to ensure that a broader range of stocks are being covered – e.g. 30 Main Board, 15 Second Board and 10 Mesdaq per research house.
3) When bringing a company to IPO, the lead manager(merchant banker/broker) will need to write published research reports (twice a year) on the company for the next 3 years. Newly listed stocks require more information.
4) All listed companies to have their own websites that will post up quarterly results as they are being announced. Explanations and justifications will need to accompany the financials from the company.
5) The setting up of a task force by KLSE and/or SC to look into improving the matter.
post script: Since the letter was published, the KLSE have started the CMDF-CBRA research scheme. The move is a move in the right direction, but I also have a lot to gripe over the quality of research presented there, and would question the real motives/agenda of some of the broking houses covering these stocks. This will be addressed in a later blog.
