Low-cost investment research ‘unsustainable’, managers claim
MiFID II will drive down the quality of investment research with coverage of smaller companies suffering as a result, according to a survey of global fund managers.
According to RSRCHXchange – an investment research aggregator – asset managers were concerned about how the unbundling of research and trading costs under the new regulations might impact investment information.
Just under half of the analysts and fund managers surveyed said they felt “worse off as a result of reduced access to research”, the report noted. A further 63% said they now took fewer meetings with sell-side research analysts.
The company surveyed 418 professionals collectively responsible for roughly $30trn (€25trn) of assets.
MiFID II represented the “biggest change to the research space in decades”, said Vicky Sanders, co-founder of RSRCHXchange.
Her colleague, fellow co-founder Jeremy Davies, added that three-quarters of the managers and analysts questioned said they saw the current low price for research as unsustainable.
“When people pay low prices they worry they will get what they pay for,” he said.
Last week, a separate report revealed brokers’ fees had dropped by almost 20% as a result of the introduction of the new rules, which took effect from 3 January.
Despite this, there was much willingness within the market for research costs to rise.
“People believe that market forces will resolve many of these issues,” Davies said. “If you pay $10,000 less then it is not sustainable to receive the same quality of research. Most people say to us that, ‘we have a fiduciary duty to pay the price that we are asked to pay’.”
The RSRCHXchange report also raised questions as to whether coverage of smaller companies might suffer post-MiFID II.
“You have to look at the short- and long-term effects,” Davies said. “Historically, research coverage has tracked liquidity; it has not tracked alpha.”
Gary Baker, managing director at the CFA Institute, a decline in the research coverage of small- and mid-cap companies could prove one of the outcomes of the implementation of the new regulations.
“One of the concerns around MiFID II is whether it will be detrimental in terms of the coverage of small caps,” Baker said. “This is something that we are interested in monitoring going forward, particularly to watch whether it drives the research capacity out of the small-cap market.”