From Institutional Investor’s 2021 All-Europe Research Team
A rising economic tide may have lifted all boats, but the leading independent research providers of Europe believe they are better placed than ever to help their buy-side clients.
“Investors are increasingly recognizing the need to reengage with research providers in order to gain a better understanding of the post-pandemic environment,” said David Bowers, head of research at Absolute Strategy Research.
Bowers said investors regained their confidence quickly after the onset of the Covid-19 pandemic, given the scale of the policy stimulus. A recent survey by Absolute Strategy found that even 18 months later more than 200 senior asset allocators running almost $5 trillion among them “shows overall confidence remaining above the average levels of the last six years — with almost three-quarters of respondents expecting equities to beat bonds in the next 12 months.”
Before the Covid-19 pandemic dramatically changed every part of working (and non-working) lives, independent financial research providers were grappling with regulation such as 2018’s Markets in Financial Instruments Directive, or MiFID II, which unbundled research spending from trading.
“Post-MIFID has been quite a long period now,” said Iain Johnston, chairman and founder of New Street Research. “It has clearly impacted research budgets and, broadly speaking, been negative for the industry overall.”
MiFID II has been used by the buy side to recalibrate and rethink their research spend, Johnston added, creating challenges for everybody from bulge-bracket to boutique firms. But he said independent research providers like New Street are uniquely positioned to continue to gain market share. “Our view is that IRP share in a number of instances, including our own, has risen during this time,” Johnston said. “More thoughtful decisions around research spend are happening despite a bundled environment and that has led the buy side to seek out where they attain maximum value and dig in to the intellectual capital specialists like us can provide.”
In addition to product differentiation, independent firms also offer service differentiation, according to Ian Harnett, Absolute Strategy’s chief investment strategist. “Our product is aimed at helping investors understand markets, rather than just providing information about is going on in markets,” he said. “This detailed integrated approach on a global level is hard to achieve for investment banks — with separate equity and fixed income teams and other IRPs — who tend to be more often than not, more of a collection of individual voices.”
In Institutional Investor’s All-Europe Research Team, buy-side investors named Absolute Strategy the overall No. 1 provider among independent research providers. The firm also topped the overall macro category for European IRPs.
New Street took second place in the overall survey and was also No. 1 for overall industry coverage. Arete Research and Empirical Research Partners took third and fourth for overall research, respectively. Cornerstone Macro rounded out the top five.
Absolute Strategy’s Bowers was the No. 1 overall independent research analyst, and he also topped the macro category.
According to Bowers, the key challenges facing IRPs remain threefold. “Firstly, the aggressively low pricing by investment banks of their research, with the cross-subsidization of their research offering to buy-side investors given their profitability relative to IRPs,” he said. “Second, the continued volume of research available from both regulated and unregulated entities as well as for ‘free’ available on the web. This proliferation of ‘views’ and information often makes it hard for research consumers to identify quality.”
Lastly, he pointed to the shift to a more “transactional” relationship between research providers and their clients, as dedicated procurement teams seek to reduce the costs of their research, with products often appearing to be compared on price rather than on “quality.”
And more regulatory hurdles are on the horizon with a proposal by the FCA to exempt independent research firms from MiFID II’s inducement rules, a complex web of rules prohibiting incentives being provided with an investment or service.
A recent 2021 survey by the European Association of Independent Research Providers found that 100 percent of its members support the FCA’s exemption with 94 percent believing that continental European regulators should follow suit.
But, Bowers noted, “The FCA are not helping IRPs in that their latest consultation document appears to suggest that the regulatory capital that IRPs will be required to hold — even though they are not trading or holding client monies — will increase more than ten-fold. Unless IRPs wish to close, many will be forced to move their businesses into the unregulated space — and avoid providing specific investment advice to clients.”
Still, Johnston of New Street believes boutique firms like his will have more opportunities to capture mindshare because of the quality of their research teams. “We believe boutiques have the opportunity to use our intellectual capital and the fact is we have more experienced analysts than traditional bulge-bracket firms.”
As both bulge-bracket and independent research teams and their clients come back to the office, the hybrid model will persist. “We are going to learn a lot more about people’s willingness to go back to where they were and to what extent the buy side will embrace the flexibility of remote,” Johnston said.
But following their clients is what providers like New Street do best. “We are flexible based on our clients’ needs,” Johnston said. “We are the sell side; we go along with what our clients need and tailor our service to what our clients want. And an environment like this is where boutique providers can excel.”