Last year we heard a lot about MiFID II, the European directive on the investment industry, particularly when it came to the way sell-side research costs will be accounted for. Actually, although only about 2% of the legislative text of MiFID II is devoted to research costs, this topic accounted for most of the public debate before the January 2018 implementation deadline.
Last year, all of our asset managers said they would be paying for research costs in hard dollars and would not be using a research payment account.
Given that research costs will probably be passed on to us one way or another through our fees, this left us wondering how transparency would be improved. We raised this with several of our managers but never really got a good answer. The real answer was that most of them didn’t really know how this will pan out.
What we do now know is that our managers are changing the way they consume external research. One of our equities managers predicted a reduction in sell-side research of about a quarter. But the manager was keen to assure us that their overall spend would not reduce. External spend would be substituted by increased internal or bespoke spend. To us, as users of active management, this seems highly intuitive.
We also hear that there is little consistency in pricing by the sell side and not much transparency. On the sell side, analyst calls are said to be down and there is less demand for corporate access at the moment. Some are hiring corporate-access professionals to step up their own engagement activities, which we definitely approve of.
One thing is also clear: in fixed income, no-one has ever really known how the research impacts on investment costs. As managers have decided to absorb this expense themselves, the true cost is still embedded in the bid-offer spread. Plus ça change, as they say.
Pieter Mullen is investment director at Wasserdicht Pension Funds