Published August 13, 2008

The cost of research and its real value

By R SIVANITHY
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WHAT price decent stockbroking research in the Singapore market?

As far as small listed firms are concerned, $13,000 appears to be too much - at least judging by recent news that the number of companies participating in the Singapore Exchange's research incentive scheme (RIS) is dwindling, supposedly because the subscription rate has risen to $13,000 a year.

Yet, significantly, user downloads have risen, from an average of 37,000 a month in 2004 to 50,000 this year. The number of registered users is also up, from 36,000 in 2006 to 64,000 now. True, access is free. But the steady increases suggest there is demand from the investing public for RIS output. So why the declining participation?

On one hand, $13,000 is not by any standards an exorbitant amount to pay for proper analyst coverage.

Furthermore, because the subscription previously cost $8,000, the incremental cost is only $5,000 a year, so it would be tempting to argue that withdrawing firms are being short-sighted in quibbling over such a small amount.

But it cannot be that listed firms are so financially ignorant that they begrudge paying an additional $5,000 a year while spurning the benefits that increased coverage can bring.

If firms know of the increasing public interest in RIS and the fact that a move of a few cents in their share price could add several million dollars to their market capitalisation, can the issue really be money?

The answer is probably not. Because the sums are modest, it has to be that small listed firms must be abandoning RIS not because the cost has increased but because the perceived benefits have not.

Here, of course, we enter controversial territory. Despite protestations to the contrary, companies inevitably equate benefits with glowing 'buy' reports that boost their share prices.

However, the essence of good research is independence, which necessitates 'sell' calls if analysts see fit to make them. There is, therefore, no doubt that a good number of withdrawals are motivated by unhappiness with negative recommendations.

Another significant factor is the present bear climate. In a bull market, everyone wants ideas on how to make money, so research becomes valuable and people are willing to pay for it. But in a bear market, no amount of fancy story-telling works, so research tends to become devalued and discarded.

It's similar to the problem faced by investor and public relations firms - companies are happy to pay for greater publicity or investor reach when things are going well, but if the environment sours, these functions tend to quickly get the chop.

If RIS is to succeed in its stated goal of raising the profile of smaller firms, there has to be a fundamental change in attitude towards research by all parties.

Firms have to recognise that research is not dispensable, and that although it cannot provide a short-term quick fix as far as share prices are concerned, ongoing coverage will eventually reap rewards.

Even if there is inadequate continuity, firms must understand that some coverage is better than none because it at least puts them on the radar screens of investors.

Brokers, for their part, have to ensure quality output by at least ensuring continuity of coverage. A common complaint from companies is that over time, different analysts are assigned to provide coverage, and this lack of continuity has an adverse effect on the reports produced.

There are, of course, a host of other problems that strike at the heart of the research function and therefore affect quality - for instance, the inability of many houses to retain good analysts, who tend to move to the 'buy' side once they've learned the ropes of their trade. This results in increased analyst turnover and reduced output quality.

However, retaining talent is an issue that brokers have had to grapple with since time immemorial and will continue to be an issue for a good while yet. For now, it has to be said that unless attitudes towards broking research change - or until this bear market ends - it is likely that RIS will continue to suffer declining corporate membership.