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Reviving the investment research market

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Reviving the investment research market

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.

Research evaluation

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.

Innovation

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.

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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