Author: Brett Clegg

Date Published: 27 Dec 2000

From section: Investment - (695 words)

Publication: Australian Financial Review

JB Were & Son has emerged as the leading broking house in the latest annual East Coles Equities Research & Dealing Report, the outcomes of which highlight the increasingly competitive nature of the industry.

Despite record trading volumes and fees capturing the headlines, the competitive tussle between broking houses stepped up a significant notch in 2000. The push into Australia by Morgan Stanley Dean Witter and Goldman Sachs, and a preference by many fund managers to have closer relationships with fewer brokers, are two elements conspiring to make the game tougher.

Like a school report card, the East Coles publication is a ``must read" for industry participants. Based on fund manager responses, it ranks houses, individual dealers and analysts.

This year, 42 fund managers responded to the survey, representing $150 billion in equity funds under management. Not only can a high East Coles ranking shore up a New Year bonus, it is waited on nervously by many broking executives who use it as a justification of their existence to overseas bosses.

Yet no international phone call will be made this year to tell a New York or Zurich-ensconced boss of being ranked No1 in the Australian market, given that an independent local won the closely fought contest.

"As a local and independent house the hurdles are great, but don't listen to the hot air from some of our offshore competitors - they are not insurmountable," says JB Were & Son's managing director, Mr Craig Drummond.  "Our clients value the fact our research is independent and represents a balanced view. It's not a corporate product."

Salomon Smith Barney followed JB Were & Son, while Merrill Lynch took out third position. Top-rated analysts included Ord Minnett's Mr Brian Johnson in banking and Mr George Colman from Salomons in media.

The rankings (see graphic) tell only half the story. Through the survey process, East Coles' principals, Mr John Coles and Mr Nicholas Coles, a father-and-son team, develop a valuable insight into the forces shaping the industry.

One key theme is the increasing division of institutional broking roles between sales trading and research sales. Imported from overseas broking giants such as UBS Warburg, the separation model reflects the different skill sets in selling research and executing client orders (sales trading).

Mr Nicholas Coles says more and more analysts are switching into research sales.

These include media expert Ms Nola Hodgson at UBS Warburg and healthcare/transport specialist Mr Steve Goldberg at Salomon Smith Barney.

``In the coming 12 months I expect this theme to evolve further, with increased specialisation in the research sales function," Mr Nicholas Coles said. This would involve teams on the desk that are focused along the lines of telecommunications, media and technology, financial institutions groups, and in resources. It is already evident in property trusts.

One point of discussion is the mixed reaction by local fund managers to the US broking model championed by Morgan Stanley Dean Witter and Goldman Sachs. MSDW was ranked 11th overall, up from 14th, and had only one analyst ranked in the top five. A sticking point for MSDW and Goldmans is that their research process is often driven out of Singapore, Hong Kong or New York to which many Australian fund managers are averse. This also goes to the heart of the survey implications on what makes a good analyst.

``There are three basic ingredients," Mr Nicholas Coles said. ``The first is being a source of good gossip through corporate spies. Then there is a good understanding of the numbers and ability to operate the models. The final is marketing and service - these are often difficult to execute successfully if based overseas."

Broking is so tough that a single call can also make or break an analyst. Numerous examples exist of fund managers marking down an analyst because of the one misdirected buy or sell call. But some analysts garner a top ranking because ``they stuck their neck out and made a bold call that paid off. That's what fund managers want," Mr Coles said.


Top 5 broking houses (research & dealing)

  2000  1999 
JB Were & Son  1  2 
Salomon Smith Barney (SSB)   2  1 
Merrill Lynch  3  5 
CSFB   4  3 
Deutsche Bank   5 6 

Top analysts (by sector) 

Banks  Brian Johnson,  Ord Minnett 
Insurance  Tony Jackson,  Macquarie Equities 
Telecommunications  Patrick Russel,  Merrill Lynch 
Technology  Craig Webb,   CSFB 
Property trusts  Mark Steinert, UBS Warburg 
Diversified resources  Ian Maxwell,   SSB 
Strategy  Neale Goldston-Morris,  Deutsche Bank 
Economics  Paul Brennan,  SSB 

Source: East Coles Equities Research & Dealing Report.