Best in Class -Insto's 8th annual fixed income research poll

At Insto, I was responsible for conducting an annual survey of fixed income investors to determine the best fixed income research analysts.


Insto Credit Research Survey published link

Insto’s eighth annual credit research poll not only reaffirmed the standings of fixed income and credit research’s established names, but heralded the emergence of some new stars on the local credit research scene.

A record number of responses were received from fixed income investors and once again Deutsche Bank was voted best overall provider of credit research.

The 2006 poll split the overall category into two sections – one for research houses with a physical presence in Australian and another for research providers to Australian fixed income investors, regardless of location.

CBA, ANZ and UBS followed Deutsche Bank for research houses based in Australia while ANZ and Citigroup tied for second place in the category of research provided to Australian investors.

Knowledge of fixed income products and markets was the key criteria used by investors to make their selection. Investors also rewarded originality and the ability to add alpha and provide trade ideas.

Citigroup was notable in its absence from the credit research analyst section. Global restructuring within the group in late 2005 precluded Chris Viol and Mark Reade from defending the title Citigroup had held since 2000.

The battle to claim the vacant crown was a closely fought contest with ANZ’s newly formed team of Sarah Percy Dove, John Mannng Bradley Bugg and Patricia Gacis sharing top spot with Deutsche Bank’s Anne Moal and Mattias Soderberg.

ANZ and Deutsche Bank claimed an impressive 28 per cent of the vote while third placed Michael Bors of CBA received 17 per cent of the votes.

The poll marked the re-emergence of ANZ credit research. Investors unanimously chose ANZ as the most improved credit research department of the last year, gaining points for its focus on offshore credit, increased high yield and hybrids coverage, new views on the market, insightful comment and an improved daily mailout.

Despite Citigroup’s absence in the credit analysts section, the bank still featured prominently in the poll, reaffirming its research capabilities. It was voted best provider of relative value and international comparative analysis and the best provider of investor education and resources.

Stephen Halmerick of Citigroup maintained an impressive run in the Australian government and semi-government bonds coverage poll finishing first with a 31 per cent share of votes, the fifth consecutive year he has topped the category.

The hybrids research category represented another success for ANZ with Patricia Gacis and Sarah Percy Dove receiving 20 per cent of the vote.

The 2005 winner- Duncan Cameron of Macquarie and Goldman Sachs JBWere’s Michael Saba and Peter Taubman each claimed 17 per cent of the vote to share second place.

The most convincing winner of 2006 was in the mortgage-backed securities category. Stephen Maher of Macquarie Research retained his position as top gun of mortgage backed coverage by with a 41 per cent share of the vote. Anne Moal and Mattias Soderberg continued to build on their success of 2005 by retaining their title for best coverage of structured securities - non-mortgage backed.

‘Pushing the book’

Changes in compliance for research departments and ‘pushing one’s book’ were the focus of the survey component of the research poll.
Respondents remained split as to wether greater compliance restrictions would be a positive or a negative for sell side research. When asked, on a scale of one to 10, whether more compliance was positive or negative for the user, the average response of 5.53 suggests indifference but strong views were expressed at either end of the scale.

Some investors feel that influence and interference from origination side of banks remains strong. More compliance would give increased confidence that credit views are transparent and provide comfort in the legal structures of securities.

Investor responses suggest that sell-side research is moderately influenced by the provider’s existing trading book.

“With credit recommendations, often they refer to holdings which they wish to move off their books,” said one investor.

“Sometimes it is blatantly obvious when a bank is pushing its book. To be fair it is usually the sales guys as opposed to the research teams,” said another.

Most investors are pragmatic with regard to book influenced research.

“We always assume they are book influenced, whether they are or not does not matter,” said one.

Global credit markets and credit default swaps are two areas where investors would like to see more coverage.

Almost 70 per cent of participants indicated that they would like to see more coverage of global credit markets while 55 per cent called for more coverage of credit default swaps.

Investors were also full of suggestions as to how Australian credit research can be improved, with one calling for more focus on drivers at a macroeconomic level such as earnings trends
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Another wanted more challenging, honest and confrontational views of credit with stronger views of absolute and relative value. A number of investors believed there should be less focus on supranational and sovereign credits, and more focus on lower rated credits.

“High grade credit functions are easy, not much that can go wrong. In the lesser credits there is very little or anything that is worthwhile domestically,” said one investor.

Other suggestions included monitoring of trade ideas and setting time frames within which spread performance is expected; others proposed more discussion on the quality of deal covenants at the primary stages of deal origination.

Not all respondents would like to see improvements in Australian credit research. As one of their number put it: “Some inefficiency in the market is not a bad thing.”
Sell-side credit research still lags in relevance compared to internal research and rating agency coverage. The average relevance of sell-side research to investors, on a one to 10 scale, was 5.63. The figure for internal research was 8.47 and 6.63 for ratings agency research.

Sell-side research was also considered relatively less relevant for larger funds, for whom internal research is more relevant.