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Market Research Competition Final Presentation
15-Mar-2013

Mr. Rohan Barnett, CEO of BCW Capital, Guest Speaker of the JSE's Market Research Competition Final Presentation, in discussion with Mrs. Marlene Street Forrest, General Manager of the  JSE at the Courtliegh Hotel on March 14, 2013.

Please see the full script of Mr. Barnett's presentation below:

On behalf of the board and management of BCW Capital, I thank you for allowing me this opportunity to participate in the final of the JSE’s Market Research Competition.  Let me begin by congratulating the finalists (Najja Daley and Andre Brown), as their astute research skill has already distinguished them among their peers. 

I have been asked to address the topic Grow Wealth through Research and Investment – a principle which historically has been and in fact remains central to the effective operation of any provider of financial services.

The historical fact is that markets are powered by sound information.  Information which is based on quality research, grounded in solid analysis of all facts and factors that are material to a particular investment decision.  Market participants crave this information.  Their desire is to invest - - they may know their level of risk tolerance or may even have a particular investment objective in mind, but very rarely do they know what to invest in. Further, often times, they are unable to on their own, obtain the necessary information that would allow them to make an informed decision.  That gap is precisely what researchers and analysts are able to bridge - - the desire to invest without the requisite market information to guide investment decisions. 

 

But you do not have to take my word for it.  Numerous experts in financial services, throughout the world have spoken to the undeniable correlation between effective research and portfolio performance.

For example, Warren Buffet has statedI will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful." In other word, be prepared to invest in a down market and to "get out" in a soaring market.  What drives this decision which to a typical investor many seem counter-intuitive – Research.

Philip Arthur Fisher, a renowned American stock investor best known as the author of Common Stocks and Uncommon Profits, a guide to investing that has remained in print ever since it was first published in 1958 has stated "The stock market is filled with individuals who know the price of everything, but the value of nothing." In other words, your typical investor focuses on price, but opportunity is most often driven by value. What drives this appreciation for value – Research; indeed, what is the basis for determining value - Research

 

Benjamin Graham, the famous American economist and professional investor who is considered the first proponent of value investing, and author of the famous treatise Security Analysis has stated “The individual investor should act consistently as an investor and not as a speculator." - meaning, an investor’s decisions must be grounded in real facts and analysis rather than risky, speculative forecasts. What drives the basis of this distinction – quality research.
Robert D. Arnott, an investor and writer who focuses on articles about
quantitative investing instructs "In investing, what is comfortable is rarely profitable."   Meaning, at times, an investor be it an institution or individual will have to step out of its comfort zone from time to time in order to realize significant gains. What supports such a decision – the quality of research underlying the investor’s decision.

Clearly Messrs. Buffet, Fisher, Graham and Arnott have an appreciation for the extent to which investment decisions are grounded in sound information but even more importantly they then use this information to drive their portfolio performance through actual investment. 

Most recently Mr. Buffet has decided to purchase Heinz.  In fact when asked about the US $23.3 billion dollar transaction,  Mr Buffett said that in 50 years of deciding whether to buy companies, he has never taken long-term economic worries into account. Interestingly, his position is that after completing the necessary research, he conducts an analysis with his vice chairman, Charlie Munger about the fundamentals of the business but not about macroeconomic policy because that is but one data point but not necessarily a determinant of an investment decision.  Mr Buffett noted that he bought his first stock in 1942 during World War II, when the US was losing the war in the Pacific.  In his letter to shareholders, Buffett said he was looking for other deals. "We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy," he wrote.

The simple fact of the matter is that research informs an investment decision and the strength of the research ultimately provides a competitive advantage to your firm and clients. Indeed, the depth of research and analysis may serve to transform markets.  Financial markets have seen this time and again throughout history.

For example:  Mutual funds- A staple of most properly diversified portfolios.  Contrary to popular belief, these are not a 19th century American invention but were first was started in the Netherlands in 1822.  The first American one was the New York Stock Trust, established in 1889. Most that followed were begun in Boston in the early 1920's.  They dramatically increased in popularity during the 1960’s. Subsequently fell off in popularity during the bear market of the late sixties and seventies and have since performed with extraordinary success. As a matter of fact, since 1940 no mutual fund has gone bankrupt.   At the end of the 1920's there were only 10 mutual funds. At the end of the 1960's there were 244, and 413 in 1980. Today there are more than 6,500 unique funds and even thousands more that differ only by their share class.

During the 1980’s markets experienced the rise of high yield bonds otherwise known as junk bonds. Junk bonds are risky investments, but have speculative appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them. A junk bond issued from a company that manages to turn its performance around for the better and has its credit rating upgraded will generally have a substantial price appreciation. The most popular dealer of these instruments was Mike Milliken of the once mighty Drexel Burnham but assisting Milliken in the creation of these products was Patrick Savin, a Jamaican.  Drexel’s network of high-yield bond buyers had reached a size which enabled them to raise large amounts of money very quickly. It was said, for example, that Milken raised $1 billion for MCI Communications, then an upstart provider of long-distance telephone services, in the space of one hour on the telephone.   With this innovation, before long, the CEOs and CFOs of many smaller and mid-sized companies previously limited to the slow and expensive private-placement market were making early-morning pilgrimages to the offices of Drexel,  seeking to issue high-yield and/or convertible bonds through Drexel Burnham. Without question, many leading entrepreneurs of the 1980s owe their success at least partly to Milken's perception of this market opportunity. I would be remiss if I didn’t mention that Milliken was later indicted and imprisoned on insider trading but that was more a function of his bad business practices rather than his product innovation. 

 

Closer to home, during the 1990’s the local markets saw the introduction of the repurchase agreement.  An instrument that allowed retail participation in debt issued by the Government of Jamaica.  Joan Duncan is credited as a pioneer in this area through the launch of Jamaica Money Market Brokers and we all know the massive industry that has since developed as a result of this innovation, as well as the institution that JMMB has grown to become as a result of its innovation.  In addition, Proven, the subject of this competition, was the first entity to use the private equity model to drive returns for its shareholders and clients.       

 At BCW Capital, we spend an extraordinary amount of time researching the markets to determine market needs and identify products and services that satisfy those needs.  To this end in late 2012 we issued US$ denominated BCW Agri Business indexed, and J$ denominated S&P principal protected notes that to date have performed exceptionally well. To facilitate market understanding of these products, we hosted a series of interactive webinars where participants were able to ask questions about the products and get a better understanding of how they functioned.  The hours of research and information gathering have resulted in a product whose performance has exceeded even our own expectations, returning in excess of seven and a half percent.

 

Similarly, we have established our offshore Barbados subsidiary, BCW LIONS – an International Business Corporation, licensed by the Barbados Ministry of International Business and Transport for the specific purpose of allowing institutions to access a best in class investment strategy in J$ terms.  We strongly believe that despite many of the regulatory challenges that must be considered in creating new products, the effort is necessary if the industry is to move forward.  The challenges of a JDX or NDX or any other macroeconomic shock must not necessarily translate into inaction or retard the development of our markets. 

Avanish Persaud, the Barbados based economist stated at the inaugural Caribbean Conference on Trade Policy, Innovation Governance and Small State Competitiveness that the Caribbean needs to think about business models on international finance that allow us to be competitive whilst complying with the international regulatory standards set by G20 countries.  He further charged that Caribbean leaders, businesses and unions were satisfied with the way things were done saying, they don’t want to invest heavily in new markets and take the risks, they are satisfied.  

Indeed, just yesterday at an industry meeting, Sonia Nicholson, Senior Director of the Securities Division of the Financial Services Commission reinforced the need for industry innovation. She indicated that it was time that the industry look to new products to complement its existing product offering.  In speaking to the need for innovation to accomplish this, she stated that the she and her team stood ready to assist the industry with public education on new products.

 

BCW believes that the Jamaica Stock Exchange, which is the Caribbean’s deepest, best capitalized and most liquid exchange is in fact an under- utilized resource, that if properly leveraged can facilitate the successful introduction of new products and services that will ultimately serve to move the regional market forward.  In this regard, we aggressively pursued member dealer status on the exchange because it is our intention to actively contribute to this process.  We will leverage or strategic relationships with international investment banking institutions to accomplish this.  As there is a whole world of financial products and services which have yet to be significantly offered in the local market place; and indeed but for a one off investor that has access to exceptional information, and expensive research facilities – the information to drive participation in new products is often unavailable.

 

Marcus Garvey said “Intelligence rules the world, and ignorance carries the burden...”

Ladies and Gentlemen, we believe that this statement is extremely important when applied to financial services.  We believe that in the post NDX environment investment and innovation in financial services is a necessary element of securities dealers in particular.  Dealers must create products which satisfy market demand while at the same time insulate their business models against exogenous shocks.  By doing so, their clients, firms and indeed the overall financial system becomes stronger as a result.  This progression ultimately is driven by the industry participants, whose creativity, tenacity and attention to detail combine to advance the market. 

You are those participants ladies and gentlemen, and I challenge you, as I’ve challenged my own team to move this market forward.