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Finding Opportunity in the Data Jungle

Data and research, long an asset manager’s best friend, will soon bring along a higher regulatory-related cost to an already crowded party.

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In the final episode of our asset manager roundtable, our panel of experts discusses the relationship between managing data-related costs and competing in a low-fee environment.

The twin issues of data and compliance have become dauntingly entwined as a result of the European Commission’s major new initiative, the second phase of its Markets in Financial Instruments Directive (MiFID II). This regulation—which U.S.-based asset managers differ on regarding its importance—increases transparency across the EU’s financial markets and standardizes the disclosures required for particular markets.

MiFID II isn’t the only regulatory story looming; a new EU regulation on financial benchmarks will also take effect in January 2018. “The benchmark regulation means that if you have any structured product, or you have any indexed fund, or if you have a passive strategy on the back of an index—now all of that is going to get regulated, and there is a litany of downstream implications for what that means regarding the pricing, and so on,” says Pradeep Menon, Managing Director, Thomson Reuters.

MiFID II is wide in scope, and includes the “unbundling” of research, a term that comes up often when financial regulatory bodies speak of pathways to more transparent dealings. As of Jan. 3, 2018, in Europe at least, payment for research can no longer be bundled along with services such as stock trades and paid for using an execution commission. The idea is that a buy-side portfolio manager, when he or she accepts free research from an analyst, is potentially under the influence of an inducement, thus looking beyond the pure interest of investors in that portfolio. With research costs starting to move into the bright light and no longer going unitemized, decision-making on what to acquire will become more complicated.

“Before MiFID II, it was common to use as many kinds of research providers as possible to get insights,” says Menon. “As an asset manager, you now have to come up with a very distinct methodology, and how you’re going to pay your sell-side broker for corporate access and for research. And each shop can be very different in terms of corporate access and client meetings, or analysts’ time. But any way you slice it, the regulator is going to walk in and say, ‘What is the methodology, how much are you paying, and where’s that check you’re cutting to pay for it?’ It can no longer be buried in a trade execution cost, or some other cost somewhere else.”

Today’s asset managers are wired to keep costs low and returns high. Informed, selective acquisition of support tools like research and consultations is thus the order of the day.

“Extended success will belong to the management company that is able to manage their costs well to take advantage of the move toward lower-fee products, even as they’re capable of moving across the investment spectrum,” says U-Wen Kok, Chief Investment Officer, RS Investments, Developed Markets Group. “If you’re able to afford large data sets, and if you’re able to afford them without having it hit your margins, you can bring some very strong products to market.”

Menon says what most people are probably thinking when he cites the overabundance of data as a legitimate business problem. “Which research report do you read, which recommendations do you read, what kind of data can you ignore? As a data and analytics provider, we need to make sure that you can sift through these various screens and know what you should be reading, and what you should be ignoring.”

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