CLSA's Insane Asylum Is Right to Quit Crazy U.S. Mission

(Bloomberg Gadfly) -- Investment research is a tough business, especially in equities. Anyone in doubt need only look at CLSA Ltd., a Hong Kong-based brokerage that's known in Asia for its independent analysis and a star-studded annual investor forum.

CLSA, whose chief executive once called it an "insane asylum" staffed by iconoclastic analysts, has retained its name for objective research since being bought by China's Citic Securities Co. five years ago. That reputation still wasn't enough for it to crack the U.S. market.

The brokerage said Monday it has shut down its U.S. equity-research operations, and will lay off 90 employees including banking analyst Mike Mayo, whose scraps with bank chiefs such as JPMorgan Chase & Co.'s Jamie Dimon have been frequent headline fodder. The firm's U.S. outfit will now focus on equities execution and trading, while expanding in fixed-income trading and funds advisory, CLSA spokeswoman Simone Wheeler said.

CLSA's U.S. adventure, which began in 2009  with the hire of analysts including Mayo, faced two headwinds that proved too much to surmount: bigger U.S. competitors, and declining profitability as asset managers built their own research teams and the costs of hiring analysts rose.

Achieving success by educating U.S. and European investors on Chinese equities was always going to be an easier proposition than taking on American firms on their own turf. Asia is where CLSA has expertise in depth. The research house was founded by two Hong Kong-based journalists in 1986, before stock markets even existed in mainland China.

CLSA Americas CEO Rick Gould said in a statement that the economics had become "increasingly challenged" in the brokerage's focal area of providing investors with insights on U.S. stocks. Star analysts don't come cheap and deep-pocketed global investment banks remain the key source of research for big fund houses.

Top off U.S. competition with shrinking equities trading -- even as fixed-income, currencies, and commodities have made a comeback -- and it becomes apparent why CLSA's U.S. research foray was always doomed.

If anything, conditions look set to become even tougher: The Markets in Financial Instruments Directive, or MiFID, a European regulation with global reverberations, will require equity research to be paid for independently instead of bundled together with trading commissions, challenging the business model for many brokerages.

Making research profitable has always been a challenge, even with star analysts who can charge up to $10,000 for a phone call with a client.

The same applies to Asia. Fees allocated to sell-side providers of research, sales coverage and corporate access on the region's stocks represented 61 percent of all cash equity commission payments last year, down from 65 percent in 2014, according to Greenwich Associates.

Yet CLSA's frank reports give it an advantage in Asia, where outspoken analysis is rare and sometimes punished quickly, as JPMorgan found earlier this year after its downgrade of Indonesian stocks.

CLSA continues to top polls of fund managers for research independence. Despite its relatively small size, the brokerage also ranks as one of Asia's top five research and equity trading houses, according to Greenwich.

That profile -- burnished by an annual conference that's boasted special guests such as Sarah Palin and George Clooney -- should be enough of an edge without the brokerage having to seek fresh pastures. CLSA is right to leave U.S. stock calls to others.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.