ASX Research Scheme Should Be Expanded and Regulated

Concerns that the ASX supported broker research on Big Un and GetSwift could lead to the end of the ASX Research Scheme, that would be detrimental to the Australian economy in the long run.

Getting rid of the ASX Research Scheme would be a mistake. Instead the scheme should be expanded to include all ASX listed companies with funding coming from a compulsory levy paid by all ASX companies. The scheme should be managed by an independent group. The ASX Corporate Governance Council would be perfect to take on this responsibility.

It is important to understand the problem that the ASX Research Scheme is seeking to address.

The ASX is in effect two markets. Institutional investors predominantly invest in ASX300 companies. These companies are mostly covered by broker research which is paid for by trading revenues.

The deeper you go into the ASX the less broker coverage there is. The problem that small cap companies find is that they would love to attract institutional investors onto their registers, but there is chicken / egg problem that without research there is a lack of confidence to invest.

The reason that this matters is that Australia’s superannuation system is rapidly outgrowing the ASX. In the next twenty years, for every dollar that goes into superannuation, more will be invested offshore.

Australia’s superannuation system’s choice of fund rules have an impact on the way funds invest. Liquidity is important with each superannuation fund managing its own liquidity budget. Small cap ASX listed companies can be illiquid and must also compete with other illiquid investments such as infrastructure.

For twenty years Australia’s superannuation system and the ASX were joined at the hip. Every dollar that went into super supported the growth of the ASX.

With the superannuation system expected to grow from $2 trillion to $6 trillion, the problem is that there are far more liquid investments offshore than there are in the ASX.

There is nothing wrong with that from an investment perspective. But there is a problem in terms of future growth of the Australian economy.
One of the key problems is that as a publicly listed company the ASX itself no longer has the same public policy responsibilities.

The ASX earns revenues from listing fees. As the CEO of ASX Dominic Stevens says in today’s AFR, the role of ASX is not to pick winners. But where the ASX puts its resources does impact on new listing opportunities. An example was that there was a time when the ASX was attracting a number of small cap miners operating in Mongolia. That wasn’t accidental as ASX was marketing its services directly in Mongolia.

The ASX Research Scheme has been operational since July 2012 but still only sees 100 small-mid cap ASX-listed companies receive in depth research from brokers. This puts ASX in the invidious position of having to select who receives the research and who doesn’t.

It would be far better if every ASX company was subject to broker research. Broker research should also be required to include ESG practices, which would help shine a light on the governance practices of companies such as Big UN.

The ASX has an opportunity to do this voluntarily. But if it is unable to convince market participants then the Federal Government should step in. It is in the interests of the Australian economy that we have a robust functioning small cap market which can provide opportunities for superannuation funds to invest in.

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