A recent Extel survey showed that while a majority of asset managers felt that the proposed MiFID II ban on paying for research with client commissions would reduce coverage of UK small cap stocks, they minimized the importance of external research relative to corporate access and in-house research. Surprisingly, a majority of asset managers did not believe MiFID II would change the competitiveness of European asset managers relative to their non-European counterparts.
A recent survey, “Unintended Consequences- The impact of the UK equity market of proposed research payment changes in MiFID II”, was commissioned by Peel Hunt, a broker specializing in UK mid- and small-cap stocks, and executed by Extel WeConvene. The survey was conducted in October and November 2014, and included 161 participants from 137 asset managers. Copies of the report can be obtained by emailing Peel Hunt at firstname.lastname@example.org.
A resounding 84% of respondents felt that MiFID II proposals would decrease analyst coverage of UK small caps and 74% believed that they would affect liquidity of UK small-cap stocks (presumably for the worse).
At the same time, asset managers do not believe high levels of analyst coverage are necessary. Approximately 30% felt that 1-3 analysts was the minimum coverage necessary to make research useful, while 45% felt 4-6 analysts sufficient.
Moreover, asset managers did not seem wildly supportive of the overall value of external research. 46% ranked corporate access (which is no longer payable with client commissions in the UK) most highly, followed by 35% that ranked in-house research most highly. Only 22% ranked research reports most highly and 2% ranked access to external analysts highest. Over 50% said they valued internal research more highly than sell-side research.
Nearly half believe research coverage of FTSE 100 stocks add value to their investment process either infrequently or not at all. Only a third felt that way about small-cap coverage.
86% felt that the MiFID II proposals would affect small asset managers more than large asset managers and 84% felt that a ban would raise barriers to entry in the investment management industry. However, 54% did not believe the proposals would change their competitive position relative to non-European asset managers.
Over 60% believed that a research commission ban would not impact their fund charges. While obviously very concerned with the impacts of a potential research commission ban, fewer than 5% felt that their clients should pay for research.
As we have discussed previously, we believe it unlikely that MiFID II will end up banning the payment for research with client commissions. The FCA has said it will abide by the MiFID II guidelines even though it could go further than the guidelines require.
Nevertheless, the survey highlights the complex relationship that asset managers have with external research. Asset managers clearly like the status quo, in which research is subsidized by client commissions, yet are not enthusiastic about the relative value of external research, especially when compared with internal research and corporate access.