Delphine Govender: Research costs across all accounts need to be accurately apportioned. Picture. Hetty Zantman
Delphine Govender: Research costs across all accounts need to be accurately apportioned. Picture. Hetty Zantman

Creating a meaningfully sized, separate pool of research allocations for black-owned and managed securities firms is needed to address the racial imbalance in SA’s securities sector, says the Association of Black Securities & Investment Professionals (Absip) Stock Broking Think Tank.

A demographic analysis of the 2017 Financial Mail analyst rankings by Primaresearch on behalf of Absip found that only 14% of sell-side analysts were black.

Absip deputy president Delphine Govender says there have been previous attempts to create such a separate pool, but the Absip think tank "feels that the total amount allocated in those instances has been too small to include most black firms and to make a meaningful difference across the industry. Thus, black firms are still very limited in attracting senior talent to work with and groom budding black analysts".

An important factor would be ensuring that the competitive criteria are appropriate for and specific to this pool. For example, she says, it would defeat the purpose and spirit if the pool’s participants are expected to compete on their ability to provide market-wide liquidity, which requires a large balance sheet which most black firms do not have. Neither should they be rated on their ability to provide research coverage on global stocks, as black firms are usually only locally situated. "Instead, in a collaborative effort between both black firms and buy-side investment managers, the competitive criteria must be fit for purpose."

Shamil Ismail, head of Primaresearch, says there are various factors that undermine transformation in the industry. "Part of the problem is that the sell-side is dominated by international banks and the BEE imperative is not as strong for them. If they want to they can easily fly someone in from London rather than develop an aspiring black professional." Another factor is the high churn rate: top young analysts are highly sought after and are quick to move to where they get better remuneration, which undermines transformation if analysts leave the sell-side for the buy-side.

Noting an uptick in the number of black analysts in 2017 to 14% from about 11.5% in 2016, he says some firms have attempted to address the issue. However, "this is typically in the form of hiring junior analysts and partnering them with a well-rated, experienced analyst, and seeing if they make it through. When you analyse the data you can see the high number of research teams [as opposed to an individual]. Of course, that will push the transformation agenda, but we need to look at how successful that model of partnering is. We need more research into that area, particularly to see if the junior partners make it through," he says.

On the impact of European regulations, known as the Markets in Financial Instruments Directive (MiFID) ll that separate research costs from execution costs, small black asset managers will struggle to take on the research costs themselves, but they will likely be forced to do so as it will be even more difficult to pass those costs on to their clients.

Govender points out that when investment managers pay for research from their own accounts rather than passing the cost on to clients, it is natural that they would want only the best value-adding research. "In the SA context, the definition of best is associated with top-ranked analysts who are almost always unaffordable to the small or midsized black-owned and managed securities firms where the majority of emerging black analysts are employed. However, the scarcity of ranked black analysts is at the heart of the transformation imperative for SA. If investment managers do not allocate a portion of their research spend to emerging or developing analysts from previously disadvantaged demographics, then it will be difficult for aspiring analysts to get sit-down time with buy-side portfolio managers since they are unlikely to be ranked. This will have a dampening effect on investment research as a viable career option for many black graduates."

Marc Ter Mors, head of equities research at Standard Bank/SBG, outlines the danger of a possible application of a MiFID-type approach in SA, which could create barriers for junior analysts to prove their value-add to investor clients, inadvertently also hindering transformation initiatives in the institutional research industry. Because asset managers are likely to cut back on the number of research houses they use, he says, they are likely to continue with experienced analysts and firms that they know well. "MiFID may consolidate business only to established sell-side firms."

He says asset managers may become more reluctant to take meetings with junior analysts who do not have the same scope and experience.

Govender says MiFID can be used to accelerate transformation in the sector. "Local investment managers’ response to MiFID II will either suppress transformation or be used as a unique opportunity to drive real change in the industry. Absip is hoping that the SA market responds in favour of the latter."

Read the full here.