MiFID Research Price War Sees Wealth Funds Focus on Quality

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SEPTEMBER 26, 2017 – As a price war causes the cost of analyst research in Europe to plunge toward zero, one corner of the investment market says quality is still worth paying for: sovereign-wealth funds.

The Nigeria Sovereign Investment Authority said the best researchers could even get paid more under the new MiFID II rules, which come into force in just over three months. New Zealand’s superannuation fund hopes the regulatory overhaul will improve returns across the market.

“I will pay more for quality research if it’s going to give me the alpha that I need,” Uche Orji, chief executive officer of the Nigeria fund and a former analyst, said in an interview in Astana, Kazakhstan. “There’s a tendency sometimes for customers to focus on the cost of something rather than the quality of what’s delivered.”

The European Union’s revised Markets in Financial Instruments Directive requires money managers to pay for research separately from broking services starting from January. There’s growing concern this will lead to hundreds of job losses among analysts, and that the quality of research will decline.

Orji, who oversees about $2 billion, warned that the new rulebook could have negative consequences for the research industry by reducing the amount available for spending on analysis.

‘Commoditize’ Research

“A good analyst can deliver you a lot of value, but if you want to commoditize it and fight about cost more than quality,” firms might lose sight of that, Orji said during the International Forum of Sovereign Wealth Funds meeting in the Kazakh capital.

An increasing number of research providers are reducing the amount they plan to charge for basic research to gain market share, and are relying on additional services such as analyst calls to generate revenue. The top 10 sell-side banks currently spend about $4 billion a year on research, but this will drop 30 percent after the rules come into force, consultant McKinsey & Co. estimates.

Bloomberg LP, the parent company of Bloomberg News, provides data and analytics as well as research management and best execution services for firms complying with MiFID II

The Abu Dhabi Investment Authority said it “began work last year on a comprehensive internal exercise to fully assess the impact of MiFID II, particularly in relation to research and the research market.” It’s “confident that it will be prepared for the January deadline,” according to a statement.

ADIA already pays for research and expects to see an increased emphasis on research quality over cost or quantity, according to a person familiar with the fund’s operations.

The wealth fund expects that the increased transparency under MiFID II will be positive and likely be demanded by investors globally and not just in Europe, the person said, asking not to be identified. ADIA managed about $828 billion in June, the Sovereign Wealth Fund Institute estimates, while its 2016 annual report showed that about 60 percent of its assets were managed by external fund managers.

Yngve Slyngstad, CEO of Norway’s $1 trillion SWF, the world’s largest, has said his fund has separated trading and research for broker commissions for more than 10 years because it views them as two entirely different services. SWFs aren’t covered by MiFID II but will be impacted because they allocate money to asset managers, which are under the rules’ jurisdiction.

Absorbing Cost

Another reason EU regulators are unbundling execution and research costs is to boost returns for investors. Most money managers have so far chosen to absorb the cost of paying for research rather than pass the charges onto their clients.

Yet Adrian Orr, CEO of the New Zealand Super Fund, is skeptical that clients will end up benefiting. “With most regulation, the costs will end up on the end consumer so asset managers will have to pay,” said Orr, who oversees almost $26 billion.

Orr’s fund is overweight on European equities and sees an “enormous opportunity” in credit and distressed credit in the region, he said.

One quandary with MiFID II is the requirement that brokerages are paid directly for research — that conflicts with U.S. rules. Wall Street brokerages are lobbying regulators to ensure the European regulations don’t spread to America, and the Securities and Exchange Commission has signaled it has increased efforts to find a solution before MiFID II takes effect.

Orr said that, generally speaking, it’s preferable for a set of rules like these to become the norm worldwide.

“Ideally, you would have a global standard,” he said in Astana. “Otherwise you end up with a lot of arbitrage and that makes it even more costly for investors.”

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