Fears grow for future of small cap analysts

Some fund managers fear the major investment banks are set to close their teams of small cap broking analysts — as they have done in previous recessions — compromising the flow of investment information and research.

“The major banks have often closed Australian small cap teams in previous downturns/recessions, and it is certainly possible this could happen again”, Opis Capital portfolio manager Rob Frost said.

He estimated that existing small cap broker teams have on average been cut by about 25 per cent by the major banks since the start of the current downturn, and said this process is “gathering pace”.

“In many instances it’s the research analysts, considered a cost centre, who are bearing the brunt of very low turnover and liquidity in the sector.

“The question is, if this becomes a much deeper cycle, as it appears it might, will the banks decide to cut whole teams of analysts on the basis that they are not making money out of them?”

If they do, it will mean “less investment info and research” for the sector fund managers who are heavily dependent on the analysis for their research and ideas generation, Frost said.

Financial planners too could have their research of stocks and managed funds compromised, particularly those who deal directly in stocks on behalf of clients.

Acorn Capital microcap portfolio manager Douglas Loh said, “We’re at the stage where analysts are being moved around within the banks or are just taking time off — although entire research teams have been shutdown in previous downturns".

“There’s a lot of refocusing of the analysts onto large caps, because that is where the banks might be able to at least generate some brokerage in the current market."

He said the “significant scaling back of research in small caps would result in less efficiency in terms of market news flow, and consequently funds from the institutions, in particular, would flow away from the sector".

However, Ed Prendergast, co-manager of Pengana's Emerging Companies Fund, sees a bright side to the “falling away of the research effort” for advisers who invest in the small caps sector via managed funds.

“There is more opportunity in the sector for experienced fund managers at a time when there are fewer people looking at the sector,” he said.

“This time last year there were a lot of small time players in the sector, such as hedge funds, large cap funds, private clients and direct investors, all chasing the sensational small cap performances.

“Now that most of those have gone from the sector you can go and see a business chief executive and, potentially, they won’t have seen anyone else in market for three months to six months."