Investment research provisions in the newly-introduced MiFID II regime will have a varied impact on pension funds, according to interviews with a number of European investors.
The new regulation, which came into effect on Wednesday, means asset managers can no longer acquire investment research for free from providers such as investment banks and brokerage firms and pass it on to clients.
For the first time, an explicit price needs to be put on research, leading to a challenging ‘price discovery’ process.
Pension funds with internal teams that acquire research directly from investment banks have, like asset managers, been engaged in this process, and have limited resources for acquiring research at a cost.
Markus Schaen, senior fund manager at Dutch fiduciary manager MN, said: “Budget constraints will likely mean that our internal teams will have to make choices and will have, as a result, access to the research from a lower number of parties under MiFID II.”
“Many of their brokers - the more traditional sell side ones - have indicated that they will charge our teams for access to research and other resources under MiFID II. The parties are currently negotiating on the price for access,” he added.
Rasmus Bessing, director at PFA Asset Management, the asset management division of Danish pension fund PFA, said it was very hard to foresee to what extent MiFID II’s research cost ‘unbundling provision will change the research landscape.
It was not unlikely, however, that it would lead to fewer providers of research, he added.
“We foresee that we will continue to to use external research,” said Bessing. “However, when the new rules come into force, we will monitor the cost associated with investment research. We believe MiFID II should not lead to increased costs overall, and we will make sure that the cost of research paid for explicitly results in lower execution cost.”
A survey carried out by the buy-side division of the International Capital Market Association in October found that 83% of respondents thought they would use fewer research providers once the new regulatory regime came into effect. The survey was focussed on research about fixed income, currencies and commodities.
According to MN’s Schaen, pension fund teams responsible for manager selection and monitoring should be affected by MiFID II to a more limited extent.
“We have used research on stocks and companies provided by sell-side firms, but to a limited extent, and we plan to continue as is.”
Tony Persson, acting head of investment management at Alecta
“It looks like the vast majority of [asset managers] will not charge us for access to research under MiFID II and will absorb the cost themselves”, he said.
Virtually all asset managers have ended up signalling they will not pass on the additional cost to clients – a survey conducted by IPE last month identified only two of the top 120 European asset managers as planning to pass on the charges to clients.
But MiFID II may lead to pressure on firms to reduce money spent on research, according to Schaen.
“This can be achieved by lowering the number of analysts and replacing more experienced but more expensive analysts with cheaper junior analysts,” he said. “[…] In any case, this will harm coverage of the market. Fewer analysts will look at a given company, which is especially true for companies that carry a smaller index weight, and less time will be spent on a company, which should lead to lower-quality analysis.”
Alecta, the Swedish pension fund, is not a heavy user of third party-research, according to Tony Persson, its acting head of investment management.
“We have used research on stocks and companies provided by sell-side firms such as brokers and investment banks, but to a limited extent,” he told IPE. ”We plan to continue as is.
“Research material is acquired without middlemen directly from our counterparty as we manage all our assets internally. We have never had to pay explicitly or implicitly for this research. All investment decisions are guided by our own internal analysis.”
There is widespread consensus, however, that MiFID II will change the landscape of investment research provision. A June 2017 report by McKinsey estimated that for European asset managers that decide to pay for research in full, profits could be reduced by as much as 15-20%. “The resulting change to research operations will be enormous,” said the report.