During the first half of 2024, a survey conducted by Substantive Research – the research and data spend analytics provider for the buy side – showed that research budgets increased both as a proportion of assets under management (AUM) as well as in absolute terms.

The survey – which assessed 60 asset management firms 60% headquartered in Europe and 40% in North America, with total AUM of more than $20trn – also showed that the cycle of endless price depreciation and budget cuts across the board in investment research has come to an end.

The Financial Conduct Authority’s (FCA) April 2024 consultation paper on Payment optionality for investment research has ignited a debate on whether asset managers in Europe can or should return their research costs back to their end investors after six years of paying these costs from their own profits and losses (P&Ls) post-MiFID II (Markets in Financial Instruments Directive 2014).

The proposed optionality from the FCA comes with many caveats and obligations, Substantive Research said, and the market views its adoption as being highly dependent on whether there will be push-back from end investors, as asset managers explore this option.

Substantive Research undertook its latest survey of the buy side to understand the impact that proposed payment optionality is having on the consumption of investment research, and how differences in US and European regulations affect pricing and payments.

Previous analysis in 2023 had shown that budgets in the US had increased as a proportion of AUM, and dipped only very slightly in the UK/European Union by the same measure. However, in monetary terms, budgets still fell by 6.5% globally as AUM was down across the universe surveyed.

As a proportion of assets managed, US budgets rose 15%, with European budgets also rising by a more modest 4%. “This shows why politicians have been pressuring the UK and EU regulators to help European asset managers return these costs back to their end investor clients,” the firm noted.

Mike Carrodus

Mike Carrodus at Substantive Research

As the cycle moves on, US research budgets bounce back much more quickly – their investment professionals have more money to spend on external research from brokers and independent providers, it added.

Overall, in monetary terms, budgets increased by 2.2%. “Although a modest rise, this fundamentally changes the dynamics of the research market. Within that figure, some providers are increasing pricing and driving greater consumption of meetings and calls with their sector analysts. We are back to a market of winners and losers, instead of almost all research providers experiencing price deflation year after year,” said Mike Carrodus, chief executive officer of Substantive Research.

Brokers still dominate research budgets, taking 85% of spend annually, which has decreased by 1% since 2023, with tooling and analytics solutions benefitting accordingly and growing from 4% to 5% of research budget allocations.

Substantive Research predicts that spending on analytics and research tooling will accelerate in the next budgeting cycle for 2025 – interest is high and these vendors are climbing up the provider list.

Carrodus said: “We saw last year that research budgets were stabilising and now we have the confirmation that the trend has turned. However, when compared with six years of price depreciation, this recovery does not take us anywhere near where research spending was pre-MiFID II.”

He added: “What this does do, is set the scene for the FCA’s new rules later this summer, with the key question being ‘will the new FCA freedoms accelerate European research spending up to a US level and trend ahead?’” 

Carrodus noted that much will depend on the reaction from the asset managers’ end investor clients, and even if research costs do end up chargeable to asset owners once again the new procurement rigour in research valuation and payments from the buy side is going nowhere.

“If this market is to reflate materially, there will need to be new demand for new asset classes, and new supply required to justify additional payments in future – a change in funding will not arbitrarily drive research pricing back to pre-MiFID II levels,” he said.

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