MiFID II is less than two months old and for many fund managers the practicalities of complying with the rules on paying for research are already throwing up plenty of challenges — in particular, for those investing in small and medium-sized companies. “The days of walking in the office in the morning and finding 100 emails [from analysts] waiting for you is over,” says Andrew Neville, a global small and mid-cap portfolio manager at Allianz Global Investors. “I can see the business models of brokers changing.” Investment bank research has been in slow decline for years, but the increased emphasis on its cost, highlighted by Mifid II, has led fund managers to question its value and pull back from all but the most worthwhile analysts. Many fund companies are now boosting their own internal research teams.
One of the main fears among investors throughout the planning of Mifid II was the impact it would have on liquidity at the smaller end of the market. If fund managers are more selective about the research they buy, fewer brokers may end up covering the smallest companies. Those that continue are likely to have reduced distribution lists. The largest companies will also be hit by the drop-off in research. But because they typically have tens of analysts covering them, the impact will not be as big. For companies covered by just one or two analysts, any reduction will be significant.
Issuers are also having to respond to the new market dynamics. Some small and medium-sized companies have set up dual broker arrangements, where they use specialist small-cap houses to distribute research to small-cap fund managers, and larger brokers to send their research to funds focused on mid-caps.
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