“Knowledge is power”, or so it is said. And empowering investors is arguably just what analysts are supposed to do. Beyond that, what makes for a good analyst is tricky to pin down, as Susanna Rust finds out from investors in a shamelessly unscientific survey.

Wanted: “A top firm is looking to add an analyst who wants to take part in a growing area for progression into … Must have …”

This could easily be the wording of a job description for a sell-side covered bond analyst, fleshed out with details about the role, such as that it would involve “analysing relevant market-related data, trends and events and formulating views and trade ideas across covered bonds in research reports for external and internal clients”, and the “qualitative and quantitative assessment of legal frameworks, primary and secondary market trends, relative value, cover pools, ratings, regulatory developments, etc”.

But what would a job specification look like if it were drawn up by investors, putatively one of the main audience groups that bank analyst research is aimed at?

Besides, of course, she or he being funny, friendly, clever, responsive, an ideal type is hard to arrive at, with different investors having different needs and preferences.

Answering the question “What makes for a good analyst?” a Germany-based fund manager began by saying that he and his team are after detail, not description.

“We appreciate an analyst taking the time to get stuck into something,” he says.

Also helpful, according to the investor, is if the analyst works at an investment bank that is well-placed as a lead manager and/or structurer, and is therefore in the know about new trends, such as conditional pass-through or SME-backed issuance.

An analyst can also add value if he or she participates in industry working groups and/or workshops, adds the fund manager, as this means that the person will be privy to ideas and discussions that are not necessarily circulating in the public domain.

The distinction between detail, or analysis, and description, is one that crops up in conversations with other investors.

An investment manager at a Dutch pension fund, for example, expresses a preference for thematic research, “where a researcher digs in”, for example with a complete focus on a particular market. Of little interest are summaries about cover pools, he adds, a stance that appears to chime with that of several other investors, who say that they go straight to issuer websites for information about collateral.

The Dutch investor says that he receives research from analysts at four to five different banks, citing Barclays and RBS as two that “really stand out” and also mentioning Citi as useful.

An Italy-based portfolio manager, meanwhile, says that he expects analysts’ research to provide over-/underweight recommendations based on fundamentals and market dynamics, and detailed analysis of deals where information is not fully transparent or difficult to gather, for example in the case of multi-cédulas, where monitoring OC and concentration levels is important. Indeed, multi-cédulas crop up frequently as a segment of the market where analyst research is much appreciated by investors.

In addition, the portfolio manager cites a capacity to capture new trends in the covered bond market, such as SME-backed covered bonds, and the relative value of covered bonds versus other asset classes, such as senior unsecured debt or agencies, as valuable.

“I wouldn’t want analysts just to focus entirely on the covered bond space, but to look broadly, including for opportunities in other asset classes,” he says.

It’s the dual recourse, stupid

Another strength, according to the portfolio manager, is a capacity to keep track of developments at an issuer level.

“Because even if it is true that covered bonds will be bail-in exempt and somehow isolated from the dynamics at the bank level, it is also true that negative newsflow can impact on spreads in some cases anyway,” he says. “So if you look at things on a mark-to-market basis it can be interesting to have that news on a timely basis.”

Indeed, the characteristics of the sponsor bank of the covered bonds comprise an aspect of analyst research that a fund manager in Ireland also says is important, but where he thinks there is room for improvement.

He says that he is after a “decent summary of the issuer”, including its strengths and weaknesses and how it is funded and what its reliance on the market is, and emphasises the importance of having a good grasp of an issuer’s credit profile.

“I think you’re adding the value by having given the detail on who the issuer is and where they’re placed and what their loan book is like, because that’s where the colour comes from ultimately,” he says. “I don’t think you can analyse the cover pool without having a very good grounding in who the issuer is and I just don’t know that a lot of analysts start at that point.

“You’ve got your dual recourse so it’s important to know who you’ve dual recourse to.”

He plays down the value of analysts providing overviews of cover pools, saying that this information is easy to obtain and that in the majority of cases there is not a lot of value to be added by analysing a cover pool, except where lower tier peripheral issuers are concerned, in which case “there probably would be quite a bit of value to be added”.

An area where he thinks analyst research is lacking is coverage of the underlying features of a given mortgage market.

“Which is a pity,” he says. “There are quite big differences in terms of what the norm is for mortgages, but that is never explained or elaborated on and I think that’s probably a weakness of research.

“For example, is it an interest-only mortgage? If so, explain why it is, even if it’s ‘because it is’.”

An overview of the issuer and the underlying mortgage market in which it operates would be the minimum he looks for “to set the scene”, says the fund manager, with information about how frequently the issuer comes to market, how often it updates its data, and “if they have the Label” also useful.

He says that he receives research from six different banks on a regular basis.

“Quite a lot are quite good at keeping me up to date,” he adds.

After taking a look at his inbox for a reminder of the research that he receives, he names Natixis, Barclays and Commerzbank as providing valuable research and “making inroads” into ticking the boxes on his wishlist.

Have I got news for you!

As well as being the name of a satirical British news programme, HIGNFY, as it is known, sums up investors’ desire to be kept abreast of current events and their implications for covered bond investments.

A portfolio manager at a large asset manager says that he finds ad-hoc newsflow or event-driven notes from analysts particularly useful, mentioning Crédit Agricole CIB senior covered bond analyst Florian Eichert as someone who does this well, as well as being able to cover the market from a credit research angle while staying on top of regulatory flux and the implications thereof.

“What’s helpful is quick and prompt information on whatever new developments there have been happening, be it a new issue, new legislation, a rating action, etc,” says the investor. “Weekly research is useful, especially if you’re travelling, but what is best for me is ad-hoc e-mails.

“I want to be able to rely on being notified when something new has happened.”

Such analyst notes may very well be heavy on facts rather than opinion, he adds, but this is not a problem and in a way desirable.

“The more facts, the better,” he says, “because I can form my own opinion.”

The cessation of a daily research note by RBS analysts was noted by a couple of investors, with the above portfolio manager saying “RBS used to do it”, in reference to the provision of timely coverage of key new developments. Another investor says that RBS used to provide “the best daily”.

RBS used to publish a “Covered Bond Daily”, but this stopped after the departure of its head of covered bond research, Frank Will, who has not been replaced. Jan King, senior covered bond analyst at RBS, leads covered bond research at the UK bank, which has switched to publishing research, “The Covered Bond Lens”, on an ad-hoc basis.

Some investors The CBR spoke to were happy to mention the names of analysts or banks they particularly like, but an appreciation of the sensitivity of doing so was also shown, with one investor reluctant to name names and another emphasising that “no-one is to be blamed for anything” given that different analysts have different client groups and different levels of internal support and resources — while all also declined to have their quotes attributed to them.

A variety of feedback on random other analysts gives a flavour of investors’ feelings towards analysts and their scribblings: Bernd Volk, head of covered bond research at Deutsche Bank — “very meticulous, very diligent” in the words of one investor and “very competent” in the words of another; Natixis, for a useful weekly newsletter; NordLB, for “a different way of writing”; and — alongside former HSBC Trinkaus head Johannes Rudolph, who is now on the buy-side at ING — Barclays German head of strategy Fritz Engelhard as a “god” of covered bond research.

Transparency, please… (if you must)

Analyst research is but one piece of the knowledge and information base that investors will try to build to help them in their jobs. Other sources include direct engagement with issuers in, for example, head-to-head meetings, internal research, platforms such as the Covered Bond Label website, and rating agency reports.

One investor paid this publication a welcome compliment when he said he accesses issuer investor relations webpages via links that are provided on The Covered Bond Report website.

Issuers may also want to take note of his apparently relaxed attitude to the consequences of not being able to get hold of information about its covered bonds in time when a new issue is launched: he’s happy to let it slide.

A relatively new source of information in the euro benchmark covered bond market is the website for the Covered Bond Label, the ECBC-led initiative. This became fully operational in January 2013, and hosts information about national covered bond jurisdictions, and, for those issuers self-certified as meeting a “Label Convention”, issuer profiles and information about their cover pools. According to the ECBC, it includes issuance data on over 4,000 covered bonds with an aggregate face value of over Eu1.4tr.

Investor comments on the usefulness of the Label website in this anecdotal survey were inconclusive — some said they had yet to use it, others said they had occasionally turned to it.

One fund manager says that the Label initiative in general is “definitively” a force for good, both reinforcing and fuelling a trend toward improved transparency — although the ideal next step would be for transparency requirements to be embedded in all national legal frameworks.

On the subject of transparency and disclosure by issuers, investors generally said that this had improved, but that the quality of information provided still varies considerably. A credit research analyst at an asset management company says there is no doubt that there is a lack of transparency and harmonisation of data despite covered bonds being a crucial funding tool.

“It is crucial that at a time when authorities want to diversify covered bond collateral they define harmonised templates, and definitions are better,” he says.

A senior fund manager, however, admitted that from a purely self-interested perspective there would be a “downside” to transparency standards becoming too high: everyone having access to the same comprehensive information would undermine his competitive advantage, he confessed.

However, he acknowledged that certain minimum transparency standards are desirable, and that these “are in principle fulfilled”.

Meanwhile, one portfolio manager made a connection between issuers delivering better information and the quality of analyst research: he noted that better disclosure would be advantageous by freeing up analysts’ time to… well… analyse.