A cut in spending on research by fund managers, caused by MiFID II rules, could be leading to poorer coverage of some sectors of the equity market, surveys of the industry have found.
Speaking to more than 500 professionals in European fund management on the impact of the updated Markets in Financial Instruments Directive (MiFID II), CFA Institute discovered almost half of those providing the research thought the quality had decreased overall.
Just 44% of respondents working for banks or brokerages said the quality of research had remained constant in the 12 months since the introduction of the regime. The same number said research quality of small and mid-cap stocks had decreased.
Rhodri Preece, head of industry research at CFA Institute, said: “Independent and sell-side research providers are under pressure, which we see translating into reduced research coverage, particularly in small and mid-cap equities, and fewer sell-side analysts.”
Since the implementation of MiFID II – which required managers to separate the cost of research from the cost of trading – fund managers have significantly scaled back the amount they allocate to research from banks and brokers.
CFA Institute found the average decrease in research budgets amounted to 6.3%.
However, the largest firms have made the largest cuts, and for those managing more than €250bn the average budget reduction has been 11%. For those managing less than €1bn, the budget change has been negligible, the institute reported.
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In another survey highlighting the impact of MiFID II, broker Peel Hunt and the Quoted Companies Alliance said nearly two thirds of investors – 62% – believed less research was being produced on mid and small-cap companies. A third said they expected further reductions in both the volume and quality of research in the future.
Steven Fine, CEO of Peel Hunt, said these were unintended consequences of MiFID II – and warned there would be more to come.
Fine said: “Specialists will become generalists. Generalists will cover too many stocks and their product knowledge will dilute. Quality will decline, gaps will appear in the market and many smaller companies will de-rate.”
Some 63% of investors polled by Peel Hunt said the regulation had produced a negative impact on the liquidity of UK mid and small-cap stocks over the past 12 months.
The broker chief said he suspected liquidity would continue to dry up, leading to companies moving off the stock exchanges and becoming private holdings.