|
|
Wednesday, 16th July 2025 |
| Hedge funds and fixed income products spur growth in upbeat environment |
back |
|
|
|
| After a couple of difficult years, the Irish stockbroking sector is back in business, with two flotations on the Irish Stock Exchange from eircom and C&C over the past year boosting revenues. Moreover, the creation of an Irish version of London’s Alternative Investment Market (AIM) later this year is also expected to increase the number of Irish corporates seeking a public offering. In addition, stockbrokers are also benefiting from the recent influx of hedge fund managers into Dublin, and see this, along with the growth in demand for fixed income products, and the strong private client and asset management business as the greatest opportunities for growth. On the downside, the ‘anomalous’ stamp duty regime continues to be a thorn in the side of the industry. FINANCE spoke to Conor O'Kelly, managing director, NCB Stockbrokers, Tony Garry, chief executive, Davy Stockbrokers, John Conroy, managing director, Merrion Stockbrokers, and Roy Barrett, managing director, Goodbody Stockbrokers. |
Q.1 In the investor service area, hedge funds/asset/portfolio management area, what new strategies are you developing?
 | | Conor O'Kelly |
O’Kelly: We’ve seen significant growth in discretionary funds under management in the private client part of the business and that is associated with the very strong growth of wealth management as a business in Ireland, where we now have wealth to manage for probably the first time in the country’s history. That’s become a much more important part of business for us and I’m sure that the trend will continue. In terms of hedge funds, we have some in-house capability but I think more and more it’s fair to say we believe that in the alternative asset management space that linking up with partners overseas who are experienced and have genuine track records over long periods of time is absolutely critical. I think one of the big mistakes of the alternative or hedge fund base in Ireland is the lack of track record. We have a number of partnerships developed with hedge fund mangers with tremendous track records in the real world of investing rather than in any fantasy world and I think that’s going to be a critical differentiating factor.
Garry: Our primary strategy is to offer detailed and expert advice on the Irish equity and bond markets from our Dublin base to our global client list. This has worked exceptionally well and has delivered superior returns to our clients who benefit from our expert knowledge of the local listed companies and the Irish market place. We will continue to focus on this strategy but are happy to tweak it at the edge by offering specialist expertise in certain areas. In recent times we have added a resource, hedge fund and trade execution capability and extended our research and dealing service to the pan European transport and leisure sectors.
Conroy: Having established a strong and defensible position in stockbroking and corporate finance, Merrion is now actively broadening its range of investor services to include funds management and property investment. In funds management, Merrion already has a very successful joint venture focused on Irish equities – Rockview Merrion, managed by Barry Connell – and a successful in-house discretionary portfolio management service. Earlier this year, Merrion took a major step in developing its funds management operation with the recruitment of a highly regarded European equity hedge fund team and the subsequent launch of the Merrion Kinetic Fund.
Barrett: During 2004, we set up our own hedge fund unit, Goodbody Alternative Management, run by long-established investment professionals. Its first product, a long/short equity fund, was launched in June. We expect this business to develop substantially over the coming years. With Irish residential property increasingly expensive, but investor demand for property undimmed, we are providing an increasing range of investment options in the sector for investors of all sizes. Tiger Developments is a commercial property vehicle focused on the UK, funded by our clients and now owning close to €1 billion of assets. We are also increasingly tailoring our pension fund products to meet client requirements. These include self managed funds, ARFs and other structures which increasingly allow investor flexibility before and after retirement. This business has enjoyed substantial growth in the current year.
Q. 2 What, if any, new products are you developing in fixed income?
O’Kelly: We are developing a number of products. We are developing a fund of funds product with an external partner who is a big name in fixed income internationally. We will be releasing that in the next two to three months. One of the big areas in fixed income that’s developed over the last number of years is in credit in Ireland and different types of structured product for the IFSC. Fixed income is a big business in Dublin, which is now the fifth largest asset management centre in Europe.
 | | Tony Garry |
Garry: With the European yield curve continuing to point to a long period of low official interest rates, buyers of fixed income products have been looking at the ‘structured products’ market to enhance their income. One of the more popular types of structure in this area has been the ‘Callable Snowball’. A recent example of this was a seven year AAA bond that pays a guaranteed 6 per cent coupon in the first year. Thereafter, the bond is callable at the issue price every six months and the coupons are referenced to six-month money market rates. In an environment where rates were to rise significantly faster than predicted, this type of instrument would see its coupons fall over the remaining years. Although not a new product area, the high yield bond market (bonds that have a sub-investment credit rating) has also witnessed huge growth in recent months. With fixed income becoming an area of greater focus in portfolios, corporate bonds are seen to have significantly higher returns than sovereign debt, with less of the risks traditionally attached to equities.
Conroy: Post–EMU, government bonds do not offer a particularly attractive business opportunity for Merrion and our involvement in fixed income is focused on corporate bonds.
Barrett: We see a growing and widening awareness on the part of investors of the risk/reward benefits of investing in different fixed income structures. These range from plain vanilla issues to Tier 1 capital and onto asset-backed structures. We expect to see Irish corporate and financial institutions take advantage of this appetite over coming years and aim to take full advantage of the opportunities presented. In addition, we see scope to fund elements of public private partnership infrastructure projects using fixed income type structures.
Q. 3 What are your thoughts on the demands of investors in the research area?
O’Kelly: I think the problem for fund mangers and investment mangers is in filtering the extraordinary amounts of information and research that are available in the marketplace, both through their screens and hard copy - it’s overwhelming really. I think that products or people with the ability to filter that information, whether they be through qualitative, quantitative or technical tools are and will continue to be in big demand. It’s the analyst or sales person that can produce trade ideas. Ultimately you have to be right more often than you are wrong to get paid in this business.
Garry: Independence and quality of research have been the key issues for investors. In a small market like Ireland they look to the local broker for information on domestic issues. Institutional investors do not rely solely on brokers for buy/sell recommendations but more on the supply of quality information (financial models etc) that allow them to make a more informed judgment.
 | | John Conroy,Managing Director, Merrion Capital |
Conroy: In the most recent downcycle (2000–2003), research analysts were the subject of some intense criticism and the previous darlings of the industry – technology analysts – were about as popular as Jacques Chirac has been in the White House during the Bush administration. In my view, successful investors use company research issued by stockbrokers as key tools in the process of making informed and superior investment decisions, rather than relying on this research for the complete investment picture. To illustrate, the stock performance of an individual company can depend on a host of factors internal to the company and on other external macro factors. Thus, fund managers are looking to company analysts for the key insights into company and sectoral operational performance, and to market strategists for asset allocation decisions. What type of company research adds value? With so many analysts covering the Irish equity market (from London as well as Dublin), traditional research focused on company operational reviews serves little purpose. Investors, very clearly, want objective, timely, insightful and original research that, properly used, provides them with a competitive advantage in stock picking. Good analysts, who can provide this research service, will always be in demand.
Barrett: There are separate categories of clients, and their requirements of us may be substantially different. Our private clients, when first investing with the firm, go through a comprehensive discussion of their requirements, wealth and risk/return profile. It is therefore entirely possible that we will be advising one class of client to buy a certain stock, but not another, so our published research for private clients must reflect the lower risk case. With regard to research for financial institutions, which is probably of most relevance to the readers of this survey, we believe that there is often a confusion between regulators, media, professional investors and personal investors as to its purpose. There is no doubt that research analysts and their output should be entirely independent of firms’ corporate business. However, perhaps the most important contribution our analysts make to our institutional client (who is now typically based overseas) is the real depth of knowledge they provide on Irish companies and their sectors. This detail is not available from the less focused international sector analysts, and as many institutions now have dedicated research teams, is just as important to them as the broker’s opinion on the stock.
A further point is that the demands of institutions can vary depending on the fund type and trading style. This is most notable with hedge funds, which typically have a very short-term perspective.
Q.4 Have you any plans to widen the scope of your equity coverage?
O’Kelly: We’d be quite different to the rest of the marketplace in terms of our equity coverage right now. We already cover or have access to coverage on 1,300 European stocks. We are members of the European Securities Network, or ESN, as it is known, where we have partnered with nine other European countries in co-ordinating European research. We are already in the European market and that has been a very important cornerstone for us and one that we will be concentrating on in the future.
Garry: We have recently extended our coverage to the pan European transport and leisure sector (airlines, airports, shipping, hotels and gaming companies). In doing so we have built on the knowledge of these sectors gained through our coverage of comparable Irish stocks (Ryanair, Jurys Doyle, ICG and Paddy Power). But our main focus remains on improving our core competence on the Irish economy and Irish stocks.
Conroy: Merrion has just broadened its equity coverage to include European equities. Our research approach for this universe of stocks marries technical, quantitative and fundamental research, a more appropriate approach for a large stock universe.
 | | Roy Barrett |
Barrett: We have increasingly found that where there is a significant Irish company in a sector, the quality of our analysts in the international arena is such that they can readily cover the direct peer group. So, for example, our analyst will discuss the low-cost airline sector with clients, including EasyJet as well as Ryanair. The same principle applies in areas such as builders’ merchanting and specialty pharmaceuticals, where our analysts have made their name internationally in Irish stocks such as Grafton, Elan and Warner Chilcott.
Q.5 How should the sales function react to changing needs of investors?
O’Kelly: Again, it comes back to question three in terms of your sales function having to react to the demands of your investors and therefore you would be mirroring the demands of your investors in terms of research and what they are looking for from the marketplace and again, the sales unction is all about idea generation. It’s all about pointing the investors into the areas where there is momentum, where there is activity, where there is unusual opportunity, and where there is value and sales people that can help that whole filtering process are valued highly by investment managers.
Garry: The sales desk interacts with the investor base right throughout each trading day. The process of managing the changing needs of institutional investors is dynamic and interactive. In addition to our daily telephone contact, we regularly meet with our client base to discuss the changing nature of the industry and the impact of these changes on their service requirements.
Conroy: As with any business, a stockbroking business must always be aware of the changing needs of its customer base. For us, this means meeting with our clients on a regular basis each year to discuss our ideas and recommendations, how our service is meeting their requirements and where improvements or changes need to be made.
Barrett: The biggest change in the market has been the increased presence of hedge funds in the Irish market. These account for a substantial part of market turnover for the large global investment banks and for a significant and increasing proportion of business in the Irish market. They require a different style of service from the traditional long-only fund managers in that they manage to maximise absolute return and therefore they are much more likely to react to trading ideas and require a more intensive sales and trading service
Q.6 What issues in the industry affected by Government do you see as most in need of addressing?
O’Kelly: That’s very easy - stamp duty. Stamp duty is a total anomaly at this point. It’s hard to overestimate the negative impact that stamp duty is having on the Irish market place but it’s absolutely unsustainable for Ireland to set itself up as a financial center with a 1 per cent stamp duty. I think at a time when single digit returns are the norm, than you can understand the impact that a 1pc stamp duty will have on people’s returns. When we had double digit returns people were less concerned to leave one per cent on the table when they did a trade but there’s no question that that is having a very negative impact on the Irish market place and of course ultimately the people who suffer are the individuals and pension funds who own these stocks and see them trading at a discount and underperforming because of that stamp duty.
Garry: Two issues stand out here - stamp duty and the special levy on the banking sector. The one per cent stamp duty for all transactions in Irish stocks is now a huge anomaly in a European context and puts the Irish Exchange at a serious disadvantage relative to its competitors. Inevitably it is encouraging alternative instruments and platforms that bypass the charge. The Irish bank sector is the largest component of the market and has to compete for the attention of international investors against UK and European banks. An arbitrary levy of the type currently imposed makes this task much more difficult and is undoubtedly damaging the rating of Irish financial stocks.
Conroy: It’s that time of year again! Though, collectively, the stockbroking community made zero impact on Charlie McCreevy’s thinking in this area, perhaps Brian Cowen will see the merit in reducing or abolishing stamp duty. The arguments have been well documented to date and the only comment I would add here is that reducing tax rates can actually lead to higher revenues. If ‘Government’ includes Government agencies, the question can be extended to its influence through regulation. Regulation is a good thing and those who are compliant have, in relative terms, most to gain; however, regulation also needs to be approached with a commercial eye on the realities of the marketplace, so that innovation in financial services and financial products is not smothered. Ireland’s success as a financial centre reflects, in no small way, the ability of our regulators to balance strong and sensible rules and compliance procedures with commercial foresight. There is a danger that this balance could be lost, as regulators, consciously or subconsciously, respond to increasing outside pressures.
Barrett: The main issue for us is the utterly disproportionate burden of risk borne by us in relation to investor compensation. Ireland has had its share of failures of stockbroking companies, albeit only three in the last twenty years. The picture in each case has been the same – small company, individuals fulfilling multiple roles, and a reliance on the Stock Exchange’s Investor Compensation Fund to pick up the pieces. This fund is contributed to by firms in proportion to their size, and the systemic features identified in previous failures are, almost by definition, only present in small firms. The reality now is that a firm must have reasonably large scale to bear the appropriate regulatory burden, and if it does not, there is a clear risk to investors, who may only be partly compensated by the fund, the remainder being at their own risk. Well-run firms are being asked to subsidise competition which takes more risk at its clients’ expense.
We are of the view that the funding of the scheme should not ultimately remain with the industry and that the contributions made by the regulated firms should be used to fund the general administrative expenses of the investor compensation company, with compensation payments under the scheme funded by a retail product/transaction levy. This structure would ensure that while the participants (ie. the regulated entities) fund the administration costs, the scheme itself would be funded by the beneficiaries; the investors. We are also of the view that it would be appropriate to introduce a risk-based approach to ensure that well-capitalised companies do not cross-subsidise weaker ones. We envisage a proportion of the participants’ risk being underwritten by obtaining insurance cover.
Another long-standing issue is stamp duty, where Ireland’s one per cent rate on share transactions continues to be out of step with its main international counterparts.
Q.7 Do you see any significant listings/delistings on the Irish Stock Exchange in the coming year?
O’Kelly: The Irish market has had two listings this year with Eircom and C&C and we might get a couple in 2005 and one or two would be the most you could hope for. In terms of delistings, the extraordinary levels of cheapness that we saw in some of the micro caps and small cap stocks has largely been removed. There could be one or two candidates for a take private. Ultimately, there are two reasons why companies list on an exchange: it’s where your investors are or it’s where your business is. You list where your business is because then you attract the analyst coverage from that market place and you list where your investors are because that’s where you get the support for your stock.
Garry: There have only been a small number of new listings on the market in recent years and we expect the flow of new listings coming to the market in the years ahead to remain fairly low. However, we are encouraged with the return of Eircom and also look forward to the return of Smurfit in the not too distant future.
Conroy: The process of delistings by way of MBOs has probably run most of its course by now. There may be one or two more but the main vulnerability is from third party takeover bids and from related party divestments. The rationale for delistings going forward is likely to centre less on addressing stockmarket underperformance and more on the opportunities presented by good-performing companies in an attractive Irish market. On the positive side, there is every prospect that there will be some meaningful additions to the Irish market this year, from both the traditional and new sectors of the economy. Also, one would hope that a recent move by a full member of the ISE to transfer to the AIM market – an unintelligible move to many– will not set a precedent.
Barrett: We have been encouraged by the return of Eircom to the market and the IPO of C&C. We expect this trend to continue with a number of smaller companies coming to the market, and inevitably, a few leaving it. While the return of former market leader Smurfit is the subject of much press speculation, it may await a stronger paper market.
The success of the Alternative Investment Market (AIM) in the UK has seen a broad range of companies coming to the market, some Irish among them. The Irish Stock Exchange is working to provide a Dublin equivalent, which is expected to start next summer. Less stringent reporting requirements and lower costs have spurred the success of AIM. We anticipate that some Irish companies will list on AIM over the coming months, and that activity will pick up as the Irish version of AIM is established.
Q.8 Are you seeing any growth in your business due to the influx of hedge fund managers to Dublin? Can you see potential for more fund managers to enter the market?
O’Kelly: This comes back to the potential for Ireland as a financial centre. There has been significant growth both in conventional asset managers, with Pioneer being the big example of that, but there have been a very significant number of other lesser known names that have set up and obviously that’s very attractive for us. I think there’s a real opportunity for Ireland to attract more and more of this mobile capital - we have all the listing functionality on the exchange, we have all the legal and investment banking expertise and there’s no reason why we can’t become one of Europe’s most dynamic financial centers.
Garry: Hedge fund managers have become much more significant players in the Irish market in recent years, and not only those based in Dublin but those based in London and the main US centres as well. That trend will probably continue in the years ahead notwithstanding the relatively poor performance of a large part of this sector in recent months.
Conroy: Hedge fund managers, especially those with a long/short equity bias are an important and growing part of our business. _The hedge fund business continues to grow exponentially, with more fund managers leaving traditional firms to set up hedge funds and more money chasing high quality hedge fund managers._ As we have strong relationships with most of the large traditional international fund management businesses, we track the departure of portfolio managers and analysts to new start-up hedge funds. While these funds often start with relatively small sums of money under management, they grow rapidly if they achieve strong performance. An increasing trend is for traditional asset management firms to start up in-house hedge funds – this part of the business has also been growing exponentially in recent years. Returns for many hedge funds have been unimpressive in absolute terms this year and, given the fee structures, this cannot continue for long or investors will decide to look elsewhere. We have already seen some moves by international hedge funds to reduce the fee structure to reflect the lower returns of recent years. Ultimately, hedge funds must generate above average returns to justify the higher fee structures – their failure to do this will be the key factor limiting the development of the industry.
Barrett: Hedge funds have been a growing proportion of our business for a number of years. Given the international base of our business, what matters to us is what the client trades in, not where the client is based. To this extent, the only beneficial effect of funds setting up in Dublin is the extent to which their managers have a propensity to trade in Irish stocks. This, in turn, is likely to be driven by whether or not the managers are Irish. So an influx of international funds does less for our business than Irish managers setting up new funds.
Q.9 What are the key challenges facing the stockbroking business going forward and what opportunities do you see for business growth?
O’Kelly: The challenges for Ireland and the Irish stockbroking business really relate to the single product nature of the business in that a lot of investors now are looking at Ireland not on a regional or geographic basis but on a pan-European sectoral basis and I think that only those firms that can provide proprietary access to European peer group information and genuinely offer seamless analysis of Irish stocks in a European context will survive and thrive. Another issue is the new FSA directive in terms of unbundling of investment management commission. How and why commission is paid to the street is going to be a material issue over the next two or three years and is going to change significantly how investment mangers interact with the street and therefore how we position ourselves in relation to them.
Garry: The private client wealth and asset management business probably represents our best opportunity for growth during the next few years. Our low interest rate environment and continued strong growth in the economy should help to sustain business in this area. However, we would also expect that the market place will become even more competitive with increasing numbers of private banks and overseas brokers vying with the local brokers for their share of the cake.
Conroy: What industry does not face challenges? In recent years, we have seen the once–mighty global consumer brands companies, such as Coca Cola and McDonalds, succumbing to changing consumer preferences and more nimble competitors; in recent months, we have seen major insurance groups face the wrath of competition inspectors and, as we go to press, the once powerful pharmaceutical industry is withdrawing major drugs at a time when the block-buster drug pipeline looks decidedly bare. Of course stockbroking has its challenges and many of these are familiar – globally, the commoditisation of the product offering, more locally, the continuing preference of many wealthy individuals for property over equities – but managers are paid to meet these challenges and to adapt to a changing environment.
Barrett: Our task, ultimately, is to match capital with opportunities. For our private client division, the capital tends to be Irish, and the opportunities global. For our institutional and corporate finance businesses, the opportunities tend to be Irish and the capital global. So to build our business, we must continue to do two things – find new and attractive global opportunities for our private client base, and find Irish opportunities to attract global capital. Our innovations over the last year have been to provide a range of new asset classes and funds to our private clients, adding pension products, property and capital guaranteed funds to our traditional base portfolios of listed assets. On the other hand, we helped bring Eircom back to a new, largely institutional, client base, funded a range of private Irish companies and projects, and advised others on how best to deploy their assets and build their businesses. |
|
|
|
|
