There is a slow evolution in the research market as the buy side is working out how to measure quality according to Andrew Skala, head of research solutions at Bloomberg.
The European Union’s MiFID II regulation required the unbundling of research payments from trading commissions, and most asset managers have since chosen to pay for research out of their own revenues.
Skala told Markets Media that an increasing number of long-only funds are setting up internal research teams.
“Fund managers are raising money based on the depth of their research so need more structure in the process to determine which of their ideas are working well,” he added.
Bloomberg’s Research Management Solutions (RMS) allows the buy-side to structure the research process and integrate it with their portfolio managers. Skala said RMS is different from other research aggregation platforms because it integrates sell-side research into the buy-side workflow and also the fund manager’s internal research into the workflow of the firm’s portfolio managers. RMS is also integrated with Bloomberg’s data, news, analytics, communications and trading solutions on the terminal,
Skala continued: “There has been dramatic reduction in sales forces on the sell side which is boosting the transition to quality. Fund managers may be prepared to pay more for the research they want."
For example, Deutsche Bank announced a restructuring this month with the firm exiting the vast majority of equities sales and trading business, while maintaining a focused equity capital markets presence and selected equity and macro research.
“As more providers focus on research as a core competency, research will become better and stronger over time,” Skala added.
Bloomberg said in August last year that BMO Global Asset Management and Union Investment had adopted RMS in response MiFID II.
With RMS fund managers can block receipt of certain content except from their preferred providers. Analytics and reporting tools allow firms to monitor and evaluate corporate access, research, and sales services based on their interactions from the terminal, Microsoft Outlook and bespoke broker files. Buy-side firms can use this data to manage research invoices and to connect to parties who will process payments. In addition, the platform has valuation scorecards to track research consumption and interactions to their budgets.
Holly Anderson, business manager, investment EMEA at BMO Global Asset Management, said in a statement at the time: “Bloomberg has been a very efficient interface between us and the sell-side as we all navigate this new regulatory landscape and the need to unbundle and value broker-provided services.”
Kevin Coleman, chief executive of expert network Coleman Research, agreed that there is now a bigger focus on price discovery and value. He told Markets Media: "Unbundling is hard to do and there is a journey for the buy side as they do not have the right systems in place to track the value delivered."
Liquidnet survey
Liquidnet agreed that the mix of brokers being used by the buy side is changing. The institutional investor block trading network’s survey in April this year said 55% of respondents are taking research from more than fifty brokers globally, the same as last year, but the composition of the brokers is not the same.
The study, MiFID II Unbundling Research – Canary in the Coalmine II, found that 69% of buy-side firms chose bulge bracket brokers for research but they differentiate between those who provide basic waterfront coverage and those where they want to engage with an individual analyst.
Rebecca Healey, head of market structure and strategy, EMEA at Liquidnet, said in the report: “There is an increased interest in smaller brokers’ offerings or specialist research provision as a way to differentiate themselves and add value to their investment process.”
She also agreed that as the sell side develops a better understanding of where it can add value and what it can charge, there may eventually be an increase in some pricing models.
The survey found that since MiFID II came into force overall research spend remained constant for nearly half, 48%, of asset managers while 13% of asset managers are choosing to increase their research spend.
Healey said: “By honing in on quality and alternatives, the opportunity for growth in research provision could be an opportunity for providers globally, not just in Europe.”
For example, 80% of research providers are now increasing their coverage of small and mid-caps in a bid to diversify their product offering. Healey continued that new third-party providers offering differentiated research will continue to emerge.
Coleman agreed that the buy side is looking for alternative sources of data. He said: “Artificial intelligence and other technology is being further developed so institutions can look for additional forms of research when making investment decisions."
Skala said Bloomberg is looking to increase use of machine learning to detect themes and uncover content in the natural workflow of fund managers. “We want to increase discoverability and surface the most relevant content,” he added.
Acquisitions
In May Liquidnet acquired RSRCHXchange, a marketplace and aggregator for institutional research which was launched in 2015 to distribute research from a variety of providers to asset managers through a centralized, cloud-based hub.
Brian Conroy, president of Liquidnet, told Markets Media at the time that the addition of RSRCHXchange allows Liquidnet to provide a new level of research and analytics more efficiently so the buy side can capture more alpha.
Brian Kleinhanzl and Mike Brown, analysts at financial services boutique Keefe, Bruyette & Woods, said in a podcast this month that firms are looking to improve best execution and research capabilities to competitively position themselves under MIFID II.
“Some are investing to do so while others have acquired,” added the analysts. “For potential targets, the ability to be a part of a larger firm is attractive due to the stability provided from a more diverse business mix, plus larger firms can provide benefits such as broader distribution, access to a balance sheet, and of course cost synergies.”
The analysts highlighted three transformative deals this year - the acquisition of research boutique Autonomous by asset manager Alliance Bernstein; broker Janney Montgomery’s acquisition of FIG, a boutique investment bank and research provider; and broker Piper Jaffrey’s acquisition of boutique Sandler O’Neill.
“Year-to-date announced volumes for financials are 8.5% higher than the same time last year and last year was up 8% year over year,” said Brown. “In the bank space, high regulatory costs and the need to invest in digital capabilities continues to drive consolidation. “
Brown said he expects consolidation to continue due to fee compression and the continued need to invest in technology.
"In advisory for financials specifically, market share on the league table-based on deal value really drops off after the bulge bracket firms and a few top specialist firms, so I see a clear opportunity for those in the 5-15 position to consolidate and become larger contenders in the financials space,” he added.
