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Focus Group: Spotlight on research costs

Pension funds have largely been absent from the debate about MiFID II and research costs. We asked a group of pension funds with total assets of over €330bn for their views 

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The January deadline for MiFID II implementation has put investment research in the spotlight. Investment managers must disaggregate research costs and decide whether to pass them on to investors or absorb them internally. 

More than eight out of 10 the investors polled for this month’s focus group say asset managers should pay for the cost of research themselves as part of the management fee they receive from clients. The remainder say managers should calculate the cost of the research at a flat rate and pass this on.“The research should be part of the daily job of the asset manager,” says a Swiss fund.

However, 71% do not think regulators should ban asset managers from passing on research costs to institutional investors. A UK fund considers it to be “unnecessary regulation” and comments: “As long as it’s fully transparent, leave it to the market. I expect most if not all managers will pay for it themselves.”

Over three-quarters of respondents do not think MiFID II will lead to an improvement in sell-side research overall. “The whole regulation is, in particular in the fixed-income space, not necessarily making things better for the end investor,” says a Dutch fund.

focus group october 2017

Almost two-thirds say the sell-side could make research more focused on long-term value to improve the quality and relevance of its output. Three-quarters say firms should demonstrate independence of research/absence of conflicts of interest and about half that they should demonstrate deep knowledge of companies. Just under four in 10 believe the sell-side should be more accountable. A Swiss fund states they should “take on responsibility and stay credible”.

Some 65% of those polled say the sell-side should invest more in producing research more relevant to long-term investors. However, a Swiss fund that disagrees with this says: “Long-term investors also need to do their research, they should not ‘buy blindly’ from sell-side.”

Two-thirds of respondents think it is far too early to tell how big data and machine learning will change the role of research and most did not take a strong position on how active managers will fare. A few respondents think big data will lead to a convergence between fundamental and quant approaches and a similar number say smaller fundamental active managers will be able to carve out an advantage by using big data. A smaller number think large spend will be crucial and that the largest active asset managers will have a clear and exclusive advantage.

Just over 40% of respondents hold a budget for investment research themselves. Less than half rate sell-side/broker research highly, while the overwhelming majority gave a high rating to their specialist research suppliers.

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