Changes to the way fund research is paid for after Mifid II may not be having the desired effect, thank to the tendency to pay for research via profit and loss in Europe, a report has suggested.
Under the Mifid II rules, investment firms need to make explicit payments for investment research to ensure that people know they are not being induced to trade.
According to research from Scope Analysis and Frost Consulting, however, the widespread move to pay for research via profit and loss “might reduce the research transparency that European regulators aimed to achieve”.
This is because P&L managers have no regulatory requirement to disclose research spending, the report stated.
Scope and Frost added this introduces “uncertainty at best; significant performance risk at worst”.
The analysts stated: "There has been well-documented downward pressure on virtually all research budgets, but this seems particularly pronounced at P&L managers where the delta of the change is unknown externally."
A major (global) European investment bank has estimated that the average P&L manager in Europe has cut 2018 research budgets by 50 per cent versus 2017, the report claimed.
Experts, including PWC, had warned before Mifid II's implementation that the change in the way research is paid for could result in “a reduction of good quality research”, particularly for smaller stocks.
PWC’s most recent report into The Future of Research stated this could be an “unintended side effect”
The Scope and Frost report stated that investors have “no easy means” to understand the implications for the investment/research process for their current or prospective investments.
The report stated: "In the Mifid II environment, the burden of proof that the agreed investment process is still intact lies squarely with the asset manager – particularly if they are funding research via P&L."
Financial adviser Minesh Patel, from London, said the implications of Mifid II had been far-reaching and some of them had been unintentionally bad for investors.
He said: “There are greater levels of compliance and accountability, but this increases pressure on advisers, and I’m not sure that in the long run it is all helpful."
Stephen Yiu, chief investment officer and lead manager of the newly launched £49m Growth fund at Blue Whale Capital, said he felt that paying for sell-side research was a waste of time.
Mr Yiu said: “We don’t think this (sell-side) research is useful. It is generic, because everyone has access to the same pieces of information. What value is it adding?
"Instead, we perform our research in-house and start from the basics, 100 per cent. When we launched in the middle of Mifid II being implemented I was quite surprised that all the fund houses were talking about how to pay for it, because the big question for me was 'why do they need it?'. They should just do their own."
rosie.murray-west@ft.com
