Two thirds of asset managers have set a research budget as required by new regulations in Europe, which consultancy McKinsey said will bring about "an end to equity research as we know it.'
MiFID II regulations coming into force in the European Union in January 2018 require the unbundling of payments for research from trading commissions. Fund managers can either pay for research themselves or from a research payment account, where the budget has been agreed with the client.
RSRCHXchange, an aggregator and marketplace for institutional research, commissioned Survation to conduct an online poll which had 562 respondents from more than 450 asset managers, predominantly in Europe. The survey found that 62% of fund managers have set, or are in the process of setting, a research budget.
Vicky Sanders, RSRCHXchange
Vicky Sanders, co-founder of RSRCHXchange, told Markets Media: “It is not an easy task to transform your research consumption and the equivalent to the Big Bang.” In October 1986 the City of London was transformed by a wave of deregulation which was dubbed the ‘Big Bang.’
In the survey 36% said they did not know how they will pay for research, an improvement on 50% at the end of last year.
“This shows that decisions are being made,” said the survey. “In this group of respondents, that decision seems to be skewed towards P&L - although this model mainly applies to the funds in the UK, Benelux and Germany. The direct charge to the client (also known as the Swedish model) was naturally very popular in Scandinavia but also in Spain.”
The setting of budgets is being held back by a lack of information on research pricing with 23% of respondents saying they have not received pricing information from any of their research providers. The survey found significant slippage in the timing for MiFID II compliance, with the vast majority of asset managers leaving this until the final quarter of 2018 or later.
Jeremy Davies, co-founder of RSRCHXchange, said: “We have had a noticeable pickup in interest in the last month from both asset managers and research providers.”
He continued that the unbundling process is well underway although setting of prices for research is not yet well advanced.
Brijesh Malkan, senior consultant at independent research provider BCA Research, said in a blog that asset managers should set out clearly structured Request for Pricing documents for their research providers that allow like-for-like comparison between products and prices.
“The quality of the question asked will ultimately drive the quality of response,” said Malkan. “When I ask my daughter how she did in her most recent exam and receive the answer “37”, she has fulfilled her requirement. If I want to know if that’s 37 out of 40 or 100, requires a clearer question.”
Malkan continued that setting prices is not impossible as research has been consumed for many years, there are many of good examples of priced markets for information services such as consultancy and the regulatory framework supports linking value to price.
“For example, managers can define ex-ante quality criteria (e.g. performance of trade ideas, serving intensity etc.) and hold some proportion of the price contingent upon meeting agreed measures,” added Malkan. “What is not acceptable is making 100% of the price contingent or not defining the quality criteria clearly and up front.”
The RSRCHXchange survey found that research budgets were expected to be relatively stable going forwards but 77% of respondents expect the number of providers to fall and 80% said they will buy research from less than five bulge bracket banks. For example, Union Asset Management, Germany’s third-largest fund manager, is going to cut more than 100 external research providers due to MiFID II, according to the Financial Times.
McKinsey & Company said in a report Reinventing Equity Research as a Profit-Making Business that asset managers will extend MiFID II unbundling beyond Europe to their global operations, leading to a sharp decline in the demand for equity research. The consultancy expects that MiFID II will be adopted as an ad hoc global standard over the coming three to four years.
The report said: “The consensus view of banks surveyed by McKinsey calls for an industry-wide drop in equity research revenues of 30% or more over the next three years. Independent research providers should see a gain in revenues from current levels, suggesting that the revenue pool for banks and brokers will likely shrink even further.”
The consultancy continued that banks and broker-dealers will need to change the types of research they provide to focus on services, such as access to analysts and corporate managements, and new forms of information and analytics through big data and artificial intelligence. For example, long-only and hedge fund managers are reportedly hiring data scientists to generate returns from insights from sources such as mall parking lots, social media, and weather satellites, as well as market data.
McKinsey said the transformation of research to a free-standing profit center will alter the industry’s economics, and raise some difficult decisions.
“McKinsey’s view is that there will be an end to equity research as we know it,” said the report. “The buyside will have to discover the value and price of research that justifies separate payments, whether funded by investors or the managers themselves, and cut back considerably on its consumption of lower-value research.”
