By Fabrice Bouland, CEO, Alphametry
The market for investment research has undergone prolific changes since MiFID II kicked off in January this year. Indeed, despite endless discussion and debate prior to the 3 January deadline, the lack of preparedness for research unbundling was palpable. We are now in a situation where this new regulation has bought the investment research market to an almost grinding halt – how long before we begin to see the adverse effects of reduced access, falling quality and unsustainable pricing on what MiFID II was ultimately put in place to protect – the investors themselves?
Commercial agreements for research portals had been put in place following a price discovery process in the latter half of 2017.But even on 3 January and to the present day some market players are still in discussions with, and even trialling, historical providers to keep pressure high within the negotiation process and better understand which providers and analysts deliver the most value. Because of this we have seen the European research market all but freeze over since the start of this year with many of the independent research houses calling for a reprieve from MiFID II rules and some predicting that asset managers are going to face a price shock as research trials come to an end in the next few months.
Besides freezing the European research market, hopefully temporarily, the first few months of MiFID II unbundling have been highly informative about two things – how is research really used and how is it evaluated?If nothing else, these first few months of pain may serve as a valuable wake-up call and prompt the entire industry to seek and implement more effective ways of evaluating and accessing the research they need.
At the end of last year and with MiFID II looming large on the horizon, European investment firms conducted last minute surveys among portfolio managers to gage opinion on which research providers were most valuable and required.
This process resulted in a consensus being established and the research franchise perimeter left mostly untouched, albeit that plummeting research prices driven by global investment banks offered quite a lot of breathing space at that point. As a consequence, cheap, in many cases almost free, bank portals were contracted and most of the higher-priced, independent research was cut off from investment managers. In more extreme cases, some smaller investment firms took the bold move of doing without research at all. A risky strategy to ascertain, one would assume, if investment research provides any value at all to the investment process.
What MiFID II has ultimately shown us is the historical ambiguity investment managers have always had with research. There has never been an easy way to answer fundamental questions like ‘what research is needed’, ‘how much should we pay for it’ and ‘how do we measure the value’. This lack of structure has been pulled well and truly into the spotlight under the new EU regulation, as well as the financial services sector’s slow take-up of new technology which would help it answer these questions.
Active management seems very ill-equipped to survive the information age. The lack of information technology systems coupled with investment styles relying on opinions and assumptions rather than a structured, analytical approach prevents discretionary managers from benefiting from new alpha-generating research, like alternative data. Interest is high but successful implementation still low so what is the solution? A new approach to research evaluation and access is clearly needed, if we can break free from the current state of paralysis in which investment managers are not getting access to the tools they need.
Any industry which does not understand where value is generated in order to deliver its business proposition shows structural signs of competitive issues. If no data can be found and used around the investment process most essential inputs, it invariably means that the tools needed to materialize it are either non-existent or inefficient. Utilising new technology could address the ‘problems with research’ that we are seeing in the current market.
Although things have got off to a slow start now MiFID II is in practice, the opportunity for research platforms that draw from multiple sources and enable the asset manager to fully evaluate particular providers or analysts is significant for both buy and sell side
Evaluation must be bottom-up and data-driven if firms are going to establish where reduced budgets need to be focused, and which providers deliver the best ROI. New research platforms provide the opportunity for managers to better understand what they consume, as well as helping providers hone in on providing the most valuable and relevant content. In the longer term, the benefits of real-time data on research must surely be the main driver of research budgeting decisions, it is just unfortunate that the new regulation and its enforcers could not have provided more impetus for change and have, so far, succeeded only in creating a market which is actually less beneficial for investors who need high-quality and relevant research in order to get the best returns.
A big opportunity for asset managers
Estimize’sCEO Leigh Drogen lay out a practical vision of discretionary managers’ future in a series of insightful articles – he concludes that in order to survive, you need to quantify.
Implementing the right technology is, in many ways, easily achievable. Technology providers, led by Fintechs, can drive the structuration, new workflows and analysis of data and research information. Software applications can now enhance investors’ capabilities while giving investment firms a data-driven overview of their business process at the same time. But in almost every firm, new tools or processes remain a delicate and constant trade-off between the portfolio manager and the c-suite, where the former must produce and the latter measures and makes investment decisions.
Technology can also enable both performance and underperformance to be reviewed analytically, rather than through the lens of an opinionated and biased conversation between portfolio managers and analysts. The software is the minimal framework to the future of investing, where qualitative inputs can be easily quantified and married with any other numerical inputs on a timescale.
To lead their investment firms into the future, management must draft new organizations which fit within a digital world. An organization where the portfolio manager plays centre field and no longer libero, and has access to the best possible yet user-friendly software. A multi-talented team to leverage new alternative data and markets. An investing team where decisions are no longer hierarchical but consensual. A team where financial incentives are aligned between the fundamental analysts, quants, data scientists, computer engineers, risk and portfolio managers.
It’s clear that something needs to change in order to free up the research market as it currently stands.
Role of regulators
So how do European regulators intend to address what is arguably and currently a worse market than we had before in terms of research? As time goes on, we will undoubtedly see the adverse effects of reduced access unless firms take action to change their approach to evaluating and using research.
Similarly, the sell side must be complicit in any solution. By sharing reports and other data on cross-industry platforms, in addition to any direct relationships they may have with buy-side firms, they will play a key role in opening up the market and boosting quality.
Asset managers may have opted for the safe bet by absorbing research costs so as not to lose clients in the short term and then looking for the cheapest option in terms of provision, but we are starting to see the outcomes of this as the months go by. It’s clear that the impact of this new world where cheap but limited access to research works for now, will not sustain asset managers’ client bases in the long term. The need for high-quality research and interactions will not change but under MiFID II access to this vital resource has been cut significantly.
Oil falls after surging past $65 on Texas freeze
By Stephanie Kelly
NEW YORK (Reuters) – Oil prices fell on Thursday despite a sharp drop in U.S. crude inventories, as market participants took profits following days of buying spurred by a cold snap in the largest U.S. energy-producing state.
Brent crude fell 41 cents, or 0.6%, to settle at $63.93 a barrel. During the session it rose as high as $65.52, its highest since January 2020.
U.S. West Texas Intermediate (WTI) crude futures fell 62 cents, or 1%, to settle at $60.52 a barrel, after earlier reaching $62.26, the highest since January 2020.
Brent had gained for four straight sessions before Thursday, while WTI had risen for three.
“The market probably got a little bit ahead of itself,” said Phil Flynn, a senior analyst at Price Futures Group in Chicago. “But make no mistake, this selloff in oil doesn’t solve the problems. The problems are going to persist.”
Though some Texas households had power restored on Thursday, the state entered its sixth day of a cold freeze. It has grappled with refining outages and oil and gas shut-ins that rippled beyond its border into Mexico.
The weather has shut in about one-fifth of the nation’s refining capacity and closed oil and natural gas production across the state.
“The temporary outage will help to accelerate U.S. oil inventories down towards the five-year average quicker than expected,” SEB chief commodities analyst Bjarne Schieldrop said.
Prices dropped despite a decrease in U.S. oil inventories. Crude stockpiles fell by 7.3 million barrels in the week to Feb. 12, the Energy Information Administration said on Thursday, compared with analysts’ expectations for an decrease of 2.4 million barrels.
Crude exports rose to 3.9 million barrels per day, the highest since March, EIA said.
“The big nugget was the big jump in exports of crude oil,” said John Kilduff, partner at Again Capital in New York. “We’ll have to see what happens with that next week weather in Texas, but I have been looking for a pickup there for a while.”
Oil’s rally in recent months has also been supported by a tightening of global supplies, due largely to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allied producers in the OPEC+ grouping, which includes Russia.
OPEC+ sources told Reuters the group’s producers are likely to ease curbs on supply after April given the recovery in prices.
(Additional reporting by Yuka Obayashi in Tokyo; editing by Emelia Sithole-Matarise, Steve Orlofsky, David Gregorio and Jonathan Oatis)
GameStop frenzy sparks fresh investment in stock-trading apps
By Jane Lanhee Lee
OAKLAND, Calif. (Reuters) – The recent trading frenzy centered on GameStop Corp and other “meme” stocks is sparking a wave of investor interest in start-ups aiming to mimic the success of Robinhood Markets Inc, whose no-fee brokerage app has helped drive a trading boom.
Public.com, a direct competitor to Robinhood that boasts a host of blue-chip backers, said on Wednesday it had raised $220 million, valuing it at $1.2 billion on the private market. Another well-heeled rival, Stash, said earlier this month it had raised $125 million, while Webull Financial LLC, backed by Chinese investors, is also raising fresh funds after enjoying an influx of new users.
Robinhood, meanwhile, raised some $3.4 billion in the midst of the GameStop furor to assure its stability amid rapid growth and demands by its trading partners that it post more collateral.
The fresh investments are coming even as government regulators ramp up scrutiny of Robinhood and others involved in the GameStop trading. A U.S. congressional committee on Thursday grilled the chief executive of Robinhood and a YouTube streamer known as “Roaring Kitty,” among others, as it probes possible improprieties, including market manipulation.
Robinhood came under stiff criticism from some quarters for restricting trading in GameStop and other shares at the height of the frenzy, a move the company says it was forced to make due to requirements of partners that settle trades. It has also drawn scrutiny for a business model that relies on payments for sending trading business to partner brokerages, a practice Public.com and some other rivals are pledging to avoid.
Investors see rich opportunity in bringing easy stock trading to smartphone users globally, though the companies say they are also cognizant of the risks.
Stash, which doubled its active accounts to over 5 million by the end of last year, operates with only four trading windows a day to discourage rapid speculative trading, it said.
U.K.-based Freetrade.io told Reuters by email that its user numbers last year grew six-fold to 300,000 and by mid-February had reached 560,000. It said it had raised a total $35 million, including from crowd-funding rounds from over 10,000 customers.
But it does not offer margin trading or riskier offerings. “These products encourage investors to behave as if they are gambling or speculating rather than investing,” a Freetrade.io spokesman said.
Interest in trading apps is soaring globally. In Mexico, trading app Flink launched seven months ago and already has a million users, according to co-founder and chief executive Sergio Jimenez. He said Mexicans can buy fractions of U.S. stock through the platform, but not Mexican stocks – yet.
“Ninety percent of them are investing for the first time,” said Jimenez.
Flink raised $12 million in a funding round in February led by Accel, an early investor in Facebook. Accel is also an investor in Public.com and Berlin-based Trade Republic Bank Gmbh, which allows European retail investors to buy fractions of U.S. stocks, according to Accel partner Andrew Braccia.
“The bigger story here is there’s just this global trend of… accessibility,” he said.
Start-up investors also see opportunity in the infrastructure behind the trading apps. DriveWealth, which serves Mexico’s Flink and 70-plus other online trading apps around the world, has hundreds more partnerships in the pipeline, according to founder and chief executive Bob Cortright. DriveWealth provides the technology to power digital wallets and trading apps, and also provides clearing and brokerage service to its business partners.
“This is this is only beginning,” said Cortright. “The fact that you could have a smartphone in your hand in India, for instance, and buy $10 worth of Coca-Cola stock at an instant, that’s pretty game-changing.”
Venture capital investments in U.S. fintech companies hit a record last year with $20.6 billion invested, according to data firm PitchBook. Globally, around $41.4 billion was invested in fintech companies in 2020.
(Reporting By Jane Lanhee Lee in Oakland; Editing by Jonathan Weber and Dan Grebler)
Analysis: Debt-laden world, rising bond yields – a toxic taper tantrum combo
By Dhara Ranasinghe and Karin Strohecker
LONDON (Reuters) – In May 2013, bond investors threw a tantrum after hints the U.S. Federal Reserve might slow the money-printing presses. A similar selloff now, with another $70 trillion added to global debt, could prove to be far more vicious.
A 2013-style “taper tantrum” was named as one of the top market risks in BofA’s February poll of fund managers who fear a pick-up in inflation expectations might soon persuade central banks to start withdrawing or “tapering” stimulus.
Some like former U.S. Treasury Secretary Larry Summers even predict this will happen sooner than anticipated if huge government spending sparks runaway inflation.
Such fears drove U.S. 10-year borrowing costs to near-one year highs on Tuesday. Equities slipped off record peaks; long-dormant gauges of Treasury market volatility flickered into life.
“Higher rates means higher rates volatility, means higher spreads and market selloffs as we saw back in 2013,” said Kaspar Hense, portfolio manager at BlueBay Asset Management who has pared exposure to Treasuries, expecting their 30-40 bps year-to-date yield rise to continue.
“There is no doubt the risks are greater this time around than 2013 because of the high leverage in the system.”
Global debt today stands at $281 trillion, according to the Institute of International Finance, versus $210 trillion in 2013. Companies and households too owe significantly more.
Economic growth and inflation can whittle away debt. Yet the very policies put in place to aid recovery can encourage more borrowing.
Debt is keeping central banks in “a loop of never-ending provision of liquidity and of very low interest rates,” said Steve Ellis, global fixed income CIO at Fidelity International.
“The only way to keep the plate spinning is keep refinancing costs low.”
Graphic: Debt levels on the rise since 2013 Taper Tantrumb – https://graphics.reuters.com/GLOBAL-BONDS/TANTRUM/bdwvknkrepm/chart.png
What bears watching is the “real” or inflation-adjusted bond yield that represents the true cost of capital. The 100 bps-plus spike in real U.S. yields of 2013 has not happened so far this time, sparing equities and emerging markets the fallout.
It also implies markets are not factoring a central bank response to higher inflation expectations.
That may be why, taper tantrum fears notwithstanding, BofA survey participants are holding equity and commodity allocations near decade-highs — with real yields near minus 1%, U.S. stocks still pay a 5% premium over bonds.
HIGHER, LONGER, WILDER
It’s not just the sheer weight of debt that makes markets more sensitive to interest rate moves.
After the interest rate collapse of recent years, just 7.8% of global government and corporate bonds on the Tradeweb platform yield 3% or more.
Global shares trade at 20 times forward earnings versus 12.5 times in May 2013.
Investors have fanned out into higher-yielding junk-rated debt and the BofA survey found a record proportion holding above-normal risk exposure.
Finally, investors are loaded up on longer-maturity debt.
Duration — how long it takes to recoup the original investment — is now 8.5 years on the ICE BofA World Sovereign Bond Index, two years more than in 2013.
Graphic: Investor exposure to duration rises – https://graphics.reuters.com/GLOBAL-BONDS/oakveradypr/chart.png
Longer-dated assets also expose investors to higher ‘convexity’ in the price-yield relationship, meaning a small rise in yields causes outsize losses.
That’s been highlighted this year to holders of Austria’s 100-year issue where a 35 bps yield rise has knocked prices 20% lower. Similarly, a 40 bps rise in 30-year U.S. yields has translated into a 4% price fall.
Ellis estimates holders of 10-year Treasuries would lose 4.62% over a month if yields rise 50 bps from current levels. A similar rise would have caused a 4.46% loss in 2013.
Similarly, JPMorgan Asset Management calculates a 1% rise across the U.S. curve would cause total annual price returns on a 30-year Treasury to fall 19%. Two-year notes would suffer a 2% price loss.
NOT ALL BAD
Some say delaying the tantrum might make matters worse.
“It’s better to put up with the tantrum when someone is two than when they are 14,” said David Kelly, chief global strategist at JPMorgan Asset Management.
Graphic: Are markets gearing up for another taper tantrum? – https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxwndrvx/tapertantrum1502.png
But most policymakers have made clear they will not hurry. Cleveland Fed President Loretta Mester for instance said the Fed was keen to avoid taper tantrums and wouldn’t withdraw support until the economy was stronger.
Central banks also are less keen than previously to tighten policy in response to a price surge, having repeatedly pledged low rates even if inflation overshootsm.
Scars from 2013 and higher global indebtedness will force central banks to “lean against” market tantrums, asset manager BlackRock reckons.
Finally, emerging markets which bore the brunt of past tantrums, appear better placed this time. Many countries, including those reliant on foreign capital in 2013, now run balance of payments surpluses.
“Positioning in emerging market securities and currencies is far below previous cycle peaks, especially 2013,” said Bryan Carter, head of EM debt at HSBC Asset Management, pointing to higher bond risk premia and cheaper valuations.
Graphic: U.S. yields and EM capital flows – https://fingfx.thomsonreuters.com/gfx/mkt/oakvermzxpr/US%20yields%20and%20EM%20capital%20flows.PNG
(Reporting by Dhara Ranasinghe, Sujata Rao and Karin Strohecker; additional reporting by Saikat Chatterjee; editing by Sujata Rao and Toby Chopra)
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