A tale of two research schemes

  • Business
  • Saturday, 27 May 2017

There is a new source of reports on small-caps. But what about the old one?

WHEN the Mid and Small Cap (MidS) Research Scheme was launched on Thursday, the joint media release from the Securities Commission (SC) and Bursa Malaysia didn’t mention a similar initiative introduced over 12 years ago. In fact, the stock exchange and the SC have a lot to do with the older research scheme too.

Remember the CBRS? The abbreviation stands for the CMDF-Bursa Research Scheme. CMDF refers to the Capital Market Development Fund, which is a trust fund that comes under the SC’s purview.

This scheme started in January 2005 with a RM7.5mil grant that Bursa received from the CMDF. The emphasis then was clearly on small-cap stocks.

“The purpose of the CBRS is to raise the profile of small and mid-sized listed companies by enabling the disclosure of timely information. This is achieved by the research coverage provided by the participating analysts,” says the CMDF on its website.

Bursa’s annual report 2004 explained that the aim of the CBRS was “to promote research coverage on more listed companies, particularly the smaller capitalised entities, as part of the exchange’s initiatives to enhance informed investing and market liquidity”.

And here’s what Thursday’s joint statement has to say about the new scheme: “The MidS Research Scheme was initiated with the primary objective of creating better value recognition of mid and small-cap companies as they form an important segment of the listed equity asset class within the overall capital market.”

Does this mean the CBRS has been scrapped and the MidS scheme is the replacement?

Apparently not. The Bursa Malaysia website has a research repository and among its contents are analyst reports from the CBRS. So far this month, there are 16 such reports.

The CBRS continues to be a joint effort between Bursa (as the scheme’s administrator) and the CMDF, which covers half of the payments to the research companies that produce the reports. But the scheme no longer focuses on smaller listed companies. Instead, any company listed on Bursa can participate in the CBRS.

Nevertheless, most of the some 120 companies in the scheme are small caps. Among the handful of heavyweights in the latest list of participants are Tenaga Nasional Bhd, Boustead Holdings Bhd, KPJ Healthcare Bhd, Malaysia Building Society Bhd, QL Resources Bhd and Bursa itself.

If there’s indeed no immediate plan to end the CBRS, is there room for both it and the MidS scheme?

The Bursa website now says the CBRS was launched “to facilitate the development and usage of equities research in the Malaysian capital market”.

“Research providers in Malaysia typically cover only the top 100 stocks listed on Bursa Malaysia. Listed companies which receive little or no research coverage are likely to be negatively impacted as they would not appear on investors’ radar,” it points out.

If that’s the case, why does the CBRS include several top-100 counters? It’s strange but it does reinforce the point that the scheme accepts all comers as long as the listed companies are willing to fork out their 50% share of the RM30,000 fee for two years of research coverage.

On the other hand, according to the SC-Bursa media release, the first 100 companies taking part in the MidS scheme had been screened based on qualitative and quantitative criteria, and each has a market capitalisation that lies within the RM200mil-to-RM2bil band.

In November, Second Finance Minister Datuk Seri Johari Abdul Ghani said the listed companies in the scheme would get free research coverage because the Government would bear the fees. He wasn’t specific about the source of the funds.

It has been reported that a research outfit would be paid RM25,000 a year to come up with at least three reports on a company. Each company will be assigned two research houses. That means the research on this pioneer batch of companies will cost RM5mil a year. And Johari has been quoted as saying the target was to have 300 companies in the new scheme.

There are big differences as well in how the two schemes are managed.

The CBRS is largely Bursa’s show. The stock exchange matches listed companies with research houses after considering sector expertise and conflicts of interest. Bursa provides administrative support for the scheme and facilitates distribution of the research reports, but doesn’t get paid for this work. This way, says the exchange, the CBRS can have independence and integrity.

However, Bursa doesn’t review the reports.

A task force chaired by the SC oversees the implementation of the MidS scheme. The other members are Bursa, Retirement Fund Inc (or KWAP), Malaysian Investment Banking Association and Association of Stockbroking Companies Malaysia.

There’ll also be an independent review panel, comprising representatives from the SC, Bursa, the industry and institutional investors. Its task is to review and ensure the quality of the research reports.

The fact that the MidS scheme’s governance structure is significantly different from that of the CBRS suggests that that the authorities are looking for results that the CBRS is perhaps not in a position to deliver.

Whether or not the CBRS will be kept running, now is a good time to rigorously assess its effectiveness and to be transparent about what can be learnt from its 12-year experience. It’s important to be open about the CBRS’s flaws and limitations so that stakeholders can better gauge the performance of the MidS scheme.

Executive editor Errol Oh hopes that the new scheme will yield insightful, fresh and interesting research reports.

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