By Fabrice Bouland, CEO, Alphametry
MiFID II is changing the face of investment research – and not just because of unbundling. We’re now over six months into the new regulation with many commentators decrying the ‘unintended consequences’ of bringing the research market to a grinding halt and sparking a price war which has all but crippled smaller, niche research houses.
The new legislation has been effective in highlighting age old problems asset managers have always had with their research; forcing them to ask questions about what research they need, how much they should be paying for it and how they measure its value. At the same time, it has also sparked a race for innovation around how managers use technology to find and evaluate research, as well as what type of research they need. It’s clear that new consumption patterns are emerging, as well as demands for new and alternative data such as credit card activity, web traffic, news and social media influence which are set to revolutionise the investment research market.
In truth, MiFID II has put active management at a historic turning point. Investment technologies now have a chance to thrive and MiFID II can claim some credit for creating this opportunity to innovate.
The new world
We are, of course, still some way off ‘MiFID II nirvana’, where asset managers can access their research from the whole market via aggregation platforms, alongside AI capabilities which extract and display relevant insights for each portfolio manager. Variety of delivery methods from traditional reports to social media data are increasingly numerous and unstructured. In our present situation, many have questioned whether MiFID II has delivered much value at all to the end user. Active managers have experienced quality evaporation in sell-side research content, as well as a minimum service attitude from their brokers. More fundamentally, a growing number are challenging their very offering such as “useless” quarterly earnings forecasts. Plummeting sell-side pricing has pushed back the much needed debate on research deliverables and with many firms simply struggling to ensure compliance, questions about quality and delivery have fallen by the wayside.
Research interactions consumption is also changing rapidly. Portfolio managers, through fear of potentially hefty prices being charged by brokers, have stopped calling their analysts three times a day. Some have even stopped attending corporate events, to the great surprise of large cap issuers which never anticipated to see their biggest shareholders’ seats empty.
A further round of research provider rationalisation is widely anticipated. Asset managers are already planning to keep a maximum of one or two providers for their basic needs per country or industry. Banks offerings are likely to be more focused in terms of geography and product and part of the sell-side is already seeking partnerships in fear of consolidation. It is the inevitable cost of progress some might say – but it needs to be combined with greater investment in innovation so that manager are getting the information they need. In the current market with access being cut and lower research quality, MiFID II has created a worse market for investors in contrary to its original objective.
New approaches to research
Regulation is forcing active managers to value their historical research franchise and this cost-benefits review has shone a light on emerging competing research products. Surprisingly, investment research has barely evolved over the last 40 years, whereas the world of investible assets has changed dramatically. Factors affecting a company valuation go way beyond the simple analysis of its financials or strategy. The digitization of people and business activity is generating a new type of valuable data. A type of data not only relying on lower latency to gain a competitive edge, but also carrying new and deeper insights when exploited in the intelligent framework of investment decision-making.
The rise of alternative datasets is one of the first manifestation of how research is about to change. A research mostly data-driven and no longer delivered as non-machine readable reports. According to a recent report by Thomson Reuter and Greenwich Associates cited in the FT, which surveyed around 30 chief investment officers, analysts and fund managers, around half think that investors will decrease their reliance on research from investment banks, and that the use of alternative data sets will increase. So although MiFID II didn’t trigger the immediate transformation some of us might have hoped for, there is hope on the horizon. The new rules have forced asset managers to look outside their traditional research parameters and sell-side will have to evolve to survive. Barry Hurewitz, global chief operating officer of UBS Group Research and its newly created Evidence Lab summarizes it clearly: “To think that an analyst with Excel, two associates, and a CFA is going to be able cope with all that data, that’s not realistic.”
As sell-side firms continue to adapt and cater for new demands, its products may no longer be exclusively research reports but also the technology layer which is able to extract intelligence from them automatically, quickly and at scale.
The buy-side has always heavily relied on the sell-side when it comes to technology whether in execution, custodian or compliance services. Yet, research information being at the heart of active managers’ core proposition, today’s rapid innovation leaves them stuck in a critical technological gap. Up to now, emails, shared drives and spreadsheets have served as a way of managing and organising traditional research reports – but these systems are unlikely to create the investment winners of the future. Capturing and processing more and more sophisticated and voluminous information, including alternative data, will require a different approach. This is probably why AXA Investment Managers recently announced it would be cutting over 200 jobs and ploughing some of the savings into more advanced data collection and analytics.
So while MiFID II’s research unbundling regulation has initially appeared to create a worse market for research, with many highlighting the ‘unintended consequences’ of plummeting prices and boutique providers being side-lined in favour of larger providers, the long-term view might paint a different picture. Here at Alphametry, we believe that progress in investment technologies is about to experience a quantum leap forward. The expected deluge of data coming their ways will unleash an unprecedented potential.