Regulation in 2018 forced European investors to pick and choose between their research providers. 2020 is showing who chose correctly.
“The value of research has never been seen to be more important than over the last few months,” said Charles Hall, head of research at Peel Hunt, in a phone interview.
Peel Hunt, which specializes in U.K. equity research, was among the many firms impacted by MiFID II — a European rule that required brokers to sell research as a separate product, rather than offer it alongside execution and trading services.
When the regulation went into effect at the start of 2018, it caused investors to “cut back on a lot of material they didn’t need,” Hall explained. But it also revealed what research was considered the most valuable — a distinction that has become essential as investors have grappled with the effects of a global pandemic.
“We have thrived through the MiFID period,” Hall said, adding that Peel Hunt’s customers have more than doubled since MiFID II went into effect. “Investors’ overall spending may have come down, but they want to get value for their money.”
The uncertainty and volatility wrought by Covid-19 has further cemented Peel Hunt’s status as the foremost purveyor of insights on U.K. small- and mid-cap stocks, with the London-based broker ranking as No. 1 in Institutional Investor’s 2020 U.K. Small & Mid-cap Research Team.
Formerly known as Extel’s U.K. Small & Mid-cap Survey, the small- and mid-cap results are the first Extel rankings to be published under the Institutional Investor brand this year, following II’s acquisition of Extel in 2018. Instead of ranking the best overall brokers, as in previous Extel surveys, this new version highlights the top firms across three categories: research, sales, corporate access.
Peel Hunt placed first in research, followed by Numis Securities in second and Investec in third.
The U.K. Small & Mid-cap Sales Team, meanwhile, was topped by Numis, followed by Investec in second and Peel Hunt in third. In corporate access, Peel Hunt was voted the top firm, with Investec coming in second and Numis taking third.
The survey, which included 293 portfolio managers and analysts across 203 firms, took place during the early weeks of the pandemic, with polling closing on April 17. This makes it one of the first to capture investor sentiment toward their research providers during the height of 2020’s uncertainty.
“The future is always uncertain — now more than usual,” said Will Wallis, head of research at Numis, by phone. “Analysts who know businesses well have been able to help institutional investors frame their thinking. While it doesn’t mean we have a crystal ball, if you have a deep understanding you are in a better position to make some judgment calls on what may or may not happen.”
Such insights have been in high demand as the Covid-19 crisis has unfolded, according to Wallis and other research leaders interviewed by II. “Like many others, we have seen a substantial spike in interactions with the buy side, particularly around mid-March,” Wallis said.
And it’s not just research departments that have to field a surge in demand: Trading volumes were also up at the start of the pandemic, as investors “shuffled their portfolios around and tried to position themselves,” according to Andrew Peck, head of Investec’s listed client group. Corporate access is also booming — in spite of the pandemic eliminating all in-person meetings and events.
“Corporate access has absolutely gone online,” Peck said in a phone interview. Despite this shift, Investec has seen “an enormous amount of contact between fund managers and analysts and companies.”
“More contact between the buy side and the sell side than I’ve ever known,” Peck added.
It remains unclear what long-term effects the pandemic will have on the U.K.’s small- and mid-cap companies, with Peck and the others suggesting that the impact will likely vary by sector — areas like travel and hospitality obviously being hit the hardest.
Research on these companies has been disproportionately impacted by MiFID II, with Peck noting that the regulation “definitely led to a reduction in the amount of small-cap and micro-cap research out there.” But the newly announced plans by the European Commission to roll back MiFID restrictions on small- and mid-cap equity research likely won’t have “anywhere near the seismic change” of the original regulation, according to Peel Hunt’s head of research.
“A large number of fund managers have already put processes in place [for MiFID II],” Hall said. “If there is a bit of MiFID rollback, they’re not going to change that structure because it will add another level of complication.”
“It will be interesting to see whether this potential change makes a material difference,” he added.