Bulge brackets still dominate research despite MiFID II

MiFID II has done nothing to alleviate the significant concentration in research budgets being directed towards the main bulge bracket banks, according to a survey from Substantive Research, a research discovery and research spend analytics provider for the buy-side.

The survey, which polled 40 asset managers across Europe and the US with assets under management of between $2 billion – $800 billion, showed that in fact, the behemoths are gaining more of the research wallet.

Although in 2020, there was a slight drop to 51.6% in the budget they received from 52% in 2020, the figure rose to 53.1% in 2021.

“MiFID II doomsayers predicted that the regulations would make the market much less competitive, and specialist, differentiated research would become less available in times of heightened volatility,” says Substantive Research CEO Mike Carrodus.

He adds, “What we are seeing now with volatile markets is a stress test proving them right, where we do not have sufficient energy analysts, for example, and asset managers are defaulting to their core relationships, the handful of bulge-bracket firms which dominate market share.

There are high quality independent providers who can provide real expertise in these areas, but they are struggling to get paid for their efforts.”

Overall, research budgets are tight with both the US and Europe experiencing a year on year decrease of 11 percentage points.

The drivers are different though. In Europe, it is mainly a cost control issue as budgets are derived from asset managers’ P&Ls while in the US, buy-side firms look for more efficient, mutually valued relationships with a core list that is still longer and better rewarded than the European counterparts.

The other trend the survey highlighted is the increasing spend on ESG research specialists. It has doubled over the past three years.

However, it has started from such a small base that it still only accounts for just under 1% of the average research budget, having increased from 0.47% to 0.95% of the average research budget from 2019-2021.

To date, asset managers have concentrated their spend on ESG data rather than on external research, and the focus has been on core brokers’ coverage on names in renewable energy and electric vehicles,

The survey noted that ESG has not created competition in the research market yet, but respondents indicate that this is more to do with lack of supply in the right areas, than lack of demand or available budget.

Looking ahead, 70% of survey respondents anticipate cost pressures from the core research providers who are already paid well.

Brokers and independents understand that, in this more volatile market and deep uncertainty amid geopolitical turmoil, “have-to-have” research providers gain greater leverage with clients and will use the opportunity to reverse the pricing trends of the past four years.

“We have already pointed to a Stabilisation of the Research Brain Drain in 2021, and 2022 will build on this trend, with a small set of brokers continuing to scoop-up quality analysts and increase market share further as their clients rely on good research to help navigate these markets,” says Carrodus.

He adds, “The bifurcation of this industry continues apace, between those firms investing in and growing their research product, and those that don’t have the revenues or aren’t prepared to subsidise their research departments.”

©Markets Media Europe 2022

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