These takeaways highlight the main themes running through the panel discussions on the day. Some of the insights may contradict each other, but that’s the nature of debate between the key stakeholders in this market!
1. Regulations are changing and the future is uncertain:
Speakers were split on whether asset managers could take advantage of the likely new regulatory freedoms in Europe. In the US the No Action relief will expire, hurting some smaller US brokers and reducing choice and diversity of research for European asset managers:
Regulatory flexibility to rebundle in Europe, which seems imminent, introduces optionality in how research can be funded. However, asset managers are struggling to see how they can ask their end investor clients to go back to paying for research after 5 years, especially in the current environment of strained performance and AUM.
Most speakers were skeptical of the European buy side’s ability to rebundle from a commercial perspective, but other speakers stated that change is coming, and that smaller European asset managers will definitely have a go at implementing rebundling with their clients. However there may be a need for much greater transparency from asset managers to asset owners in order to be ready for it.
The SEC’s announcement that they would not roll the existing No Action relief covering European research payments has created a great deal of friction in the market. The largest asset managers in Europe are currently paying for research in cash and view the discontinuation of the SEC No-Action relief on July 3rd as the brokers’ problem, not theirs, and will accept losing access to some brokers as a result. Smaller asset managers with RPAs have more options, and may be keen to ensure they maintain access to certain niche brokers by adapting their approaches.
Whether you are impacted on the buy side depends on where your people are, where your clients are, and where your research providers sit. Most of the largest global brokers do not intend to register as Investment Advisors in order to fix the regulatory disconnect, and will be taking payment for global research relationships in cash through their European entities. This gives the largest asset managers comfort that the majority of their research flow is protected, and so the focus moves onto smaller US brokers to see what their responses would be.
Some have registered as IAs, but many have not either because they don’t want the expense, hassle and regulatory implications for what may be a limited amount of European revenues. At the moment it is uncertain how much research will stop being sent to European-based clients, and how much money will be lost to US niche brokers as a result. (There was also some discussion on whether asset managers would need to check up on the validity of their brokers’ assertions that they could take hard dollar payments, and there was some consensus that they do not need to do so and could take them at face value. But please check!)
The European changes do not arrive in time to help the situation with the SEC No-Action relief. It seems clear from recent pronouncements that the SEC will not bow to pressure from Congress and the relief will expire on July 3rd this year, so by the time anything concrete happens in Europe most buy and sell side firms will have decided on their solutions and moved on.
2. Research Providers will need to focus on transformative technologies and differentiated datasets in order to compete, and even then M&A will be tempting in a tough market
Generative AI and a number of other technologies have the potential to transform the research landscape, allowing providers to extract insights from rapidly growing volumes of unstructured content, as well as replacing manual labor in the creation and maintenance of research and models. But real insight from analysts who can join the dots in highly complex market environments looks like something that the tech won’t replace anytime soon. As this all evolves there is a strong need for transparency and auditability as the technology seeks to help further up the value chain.
The opportunity is there to scale and create efficiencies, and this is key, as client engagement with providers has risen rapidly in the current market environment, also providing a fertile market in which to grab market share.
From the client side, buy side analysts and portfolio managers want to find what they need quickly, regardless of whether it’s a datapoint or something in a research report. They want to be able to overlay their own analytics with their own data science teams and models with the work that’s coming in from external providers. But at the same time they need to be able to access the trail back to the original source.
Industry consolidation is a reality both on the demand and supply side. Asset manager consolidation will drive further pressure on pricing and budgets (with hedge fund launches at their lowest rate for 6 years), and on the supply side the M&A that we are witnessing is a natural response to a tougher climate and the resulting need to seek cover within a more subsidized model. But asset managers may negotiate harder with merged firms, and some on the buy side have observed that there’s less pressure on research revenues from providers after an M&A event, which they will obviously welcome!
3. Budgets are under scrutiny, and research and data budgeting is becoming increasingly integrated.
Budgets are typically structured based on strategic priorities and team sizes, rather than market movements or assets under management. In the US budgets are traditionally higher than European ones, but commission wallets may grow and shrink with market trends. This means that transparency internally and externally matters – you need to be confident that you are identifying what has gained traction with investors, and who you need to incentivize accordingly.
Research and data budgets are aligning. That doesn’t mean that it’s completely a zero sum game and one more terminal means less equity research, but the investment function is becoming more aware (and accountable in the case of P&L payers) regarding the spend on both sides.
Data demand is also changing. ESG started with exclusions, then moved onto ratings, and now we have reached the stage where clients are trying to get an edge using forward looking information. Investors are now becoming less focused on incumbent ESG rating vendors and are now asking for unique dataset that helps differentiated analysis of companies.
Alt data is coming out of research budgets which is a zero-sum game with broker research – sometimes it’s even in the vote. The buy side wants the sell side to step up and do more with data and help join the dots, and the rewards are there through the existing research valuation system that asset managers have in place. Data will increasingly become a key driver as brokers compete for market share at the top of buy side lists. But the onus is on the users of research and content to make the questions they want answered to be clear.
4. Corporate Access is back in person, but technology is extracting and scaling the distribution of content to a larger audience:
In person meetings are back with a vengeance, and volumes have never been higher. But corporate travel is more ad hoc and selective, and meetings are happening in a more fragmented way. This can be difficult for planning but does present opportunities for buy side firms that can respond flexibly.
There is a frustration within the torrent of demand that some events can become less valuable in the current environment. Long onlys worry that they can be taken for granted, while also being a key draw for any event. On the other hand long onlys and hedge funds can often enjoy having each other in the room, so that they can hear from other focuses that can be useful. One-on-ones will always be important, but group meetings are becoming increasingly more popular as investors want to hear what their peers are asking.
New technologies and tooling exist to both manage the corporate access process as well as extract and search content that comes out of meetings and conferences. While nothing replaces that one-on-one meeting, remote attendance has increased in quality and corporates appreciate the opportunity to cover multiple events and meetings without having to travel. Conversely the buy side appreciates the opportunity to tag, process and search through extracted content from multiple event sources. Corporates are also looking forward to further automation in investor targeting, content management, peer reviewing etc.
There will always be a friction with hybrid events – the trade off between accessing larger numbers virtually while also ensuring quality experiences for in person attendees is one that needs to be managed carefully. The extraction of content and data from either type of event can augment the impact this information can have in the market, but this doesn’t negate how relationship-driven this industry can be.
On the sell side, any help with investor targeting is an important differentiating factor with corporates. Corporates also care deeply about being armed with the information that they need before a meeting – even if it’s been organized at the last minute they need to find which table to go to in the restaurant!
5. Research valuation processes are the only way to hedge against a number of potential regulatory outcomes:
The buy and sell side are increasingly aligned, but it very much depends on the particular firms on each side. The vote has evolved enormously in the last few years – buy side firms that provide vote data down to the analyst level will get better service, as providers can respond to messages and cover asset managers more effectively.
The sell side models their efforts on consumption and cost of production, the buy side models their rewards based on consumption and value. With so many interactions not driving value and not making it into actual payments, there must be improvements that can be made to reduce that dynamic. This may be because there is a lot of waste and some providers are uploading every tiny interaction including pushed content etc., but some speakers also said that given that beauty is in the eye of the beholder, supply will always need to be comprehensive to allow investors to pick through what’s available and find value (or not) from different sources at different times.
Even if you aren’t covered by MiFID II a strong research valuation process is desirable. It’s impossible to keep everyone on the sell side completely happy all the time, especially in the current investment climate. You need to optimize the budget as much as possible, and you can only do that if you properly understand when you are speaking to a have-to-have provider and when you are speaking to a nice-to-have provider.
With the regulatory outlook so fluid, the one constant should be the ability to transparently communicate research value to a variety of possible stakeholders. Some speakers said it was the best way to ensure that P&L funding doesn’t take over in the US, and others said it was the only way to hedge for all the changes coming in Europe. Buy side speakers were clearly committed to their valuation processes and if anything were developing them further. So at least we all have one thing we can be clear on as all the regulations change around us!
A big thank you once again to all our speakers, and thank you to our attendees for their engagement and support. See you all in London on November 8th!
