The arrival in January of new European markets rules, known as Mifid II, prompts me to wonder whether the status of sellside investment research is about to turn full circle.
Big Bang and a bull market led to a boom in capital markets activity in which analysts were used to attract corporate finance business. They became highly paid and famous, and during the internet bubble of the late 1990s they acted as secret agents promoting their investment banking departments’ new issues.
Mifid II will require fund managers to pay banks and brokers directly for research instead of combining the cost with execution charges. The price of research and whether the fund manager or end investor picks up the bill is still to be resolved, but amid the fog of unintended consequences the one certainty is that both sides will look more closely at the economics of research. This might lead investment managers in the UK and Europe to decide that they can do without it altogether, but this is unlikely. External research helps to establish context and consensus, particularly for smaller capitalised stocks. Analysts with a deep knowledge of the companies they follow and an understanding of how to apply it will be valued by active investors — but there will not be room for many. Alongside them will be a cadre of well-regarded specialists following smaller companies and a rump of junior analysts producing data-driven research. There will be a market for research but it could be very small.
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