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MiFID II made banks charge investors for the research they provide, rather than bundling the cost into commissions for trading. Critics said that smaller listed companies would suffer as a result, as banks’ research departments focused their efforts on mega-caps which tend to throw off all sorts of ancillary fees. Deprived of coverage by analysts, small and mid-caps would be left shouting into a void. Public markets designed to nurture young stocks would shrivel and die. A rule designed to improve transparency and strengthen investor protection could, therefore, achieve something like the opposite. “You end up in situation where, like in income inequality, the rich get richer,” says one research head at a top five bank. “Larger-cap companies are oversupplied with analysts, while small-caps are undernourished.” Now, a little over a year into the new regime, some of that scenario has come to pass. Banks have laid off hundreds of analysts as asset managers have made big cuts to their research budgets, slashing their lists of external providers.
Between 2002 and 2017, the average coverage on stocks in the Numis Smaller Companies Index (which excludes companies which simply invest in other companies) rose from two analysts to almost six. A year into Mifid II, the average has dropped closer to five, which could imply something of a knowledge gap in the market. But consultants say that many companies have tried to compensate by hiring more staff in investor relations, so that they can make pitches to investors directly. Some are retaining so-called “sponsored research” firms like Edison and Hardman, which produce research reports signed off by the IR department. Those reports can be distributed to investors of all kinds for free, without falling foul of Mifid. Meanwhile, there are plenty of listed companies which have never really courted analyst coverage, on the basis that regular financial statements should give the market enough to go on. Games Workshop, for example, is a £1bn-in-market cap company that has no press office, let alone an IR department. Charles Hall of Peel Hunt is the only analyst covering the stock, acting like an external liaison for the Nottingham-based retailer, which specialises in tiny fantasy figurines.
Year two of Mifid II could be trickier. Anecdotal evidence suggests asset managers’ research budgets could fall another 20 to 30 per cent, after heavy cuts a year ago. That will probably make life more uncomfortable for the analysts — and perhaps by extension, the companies they cover. But for now, the only really clear trend is that banks have put a price on their research, and investors are paying it. Pretty much, in fact, as the EU intended.
Full article on Financial Times (subscription required)