In late June we hosted the 2020 summer edition of Unbundling Uncovered with this year’s event held virtually before a broad audience of 700 delegates from across the US, Europe, UK and Asia. Going virtual was indeed a key theme throughout the event, as the industry responds to the increasing demand for research and interactions in a time of greater uncertainty. Amid all of this, the regulatory environment continues to change too, with Europe announcing proposals to roll back some of the unbundling rules implemented with MiFID2. The notes below are a mix of opinions and comments from panels throughout the day. Any inaccuracies or inadequate paraphrasing is a function of our note-taking – we’ve done our best but do let us know if anything needs correcting! Here’s what we learned.
1) Rebundling research; another layer of complexity:
Delegates of Unbundling Uncovered were given a one month head start to digest the potential for changes to unbundling rules in Europe with our Q&A session with Rudolf Siebel from the BVI German Fund Trade Association. Siebel provided some excellent colour on the conversations that had been taking place between regulators and trade associations and the probable changes being proposed. This became a reality last week. The two key proposed changes related to:
-SME research – A rollback in unbundling rules for coverage of companies with less than 1 billion euro market cap
-Fixed income research: Exemption for fixed income research
What our speakers said:
-On the surface, the changes are just a partial rollback, but it remains to be seen what the second-order effects will be on the research market. As this Integrity Research article highlights, the new rollback provisions seem to be targeted at helping smaller and medium-sized asset managers in Europe with smaller research budgets, rather than the large global asset managers some of whom took part in UU 2020 discussions.
-The consensus among the asset managers who spoke at UU 2020 was that a consistent regulatory regime was the most desirable outcome, and they indicated their preference NOT to revert back to a bundled model, from their current P&L model, which had been widely adopted in Europe after MIFID2.
– As one buyside speaker put it ‘’it’s unlikely we would go back to our clients to say we’re now paying P&L so we’re paying for your research, and now by the way, we’re going to ask you now to begin to pay for it again.”
-Separately, other panelists said that from the perspective of its members, these proposed changes in the rules, and how they are applied, would need careful calibration. While they said there was merit in making some concessions for SME research, there was a risk of increasing complexity for asset managers and their end clients by effectively operating under three regulatory regimes simultaneously (Europe, UK and US). Asset managers might begin to question whether it was even worth it, because of the complexity and administration (when talking about bundling SME research only, as an example).
-On the issue of sponsored research for SMEs one of our buyside speakers said that his firm had thought long and hard about this type of research, where the natural reaction of investors was that it was conflicted. However, he indicated perceptions were changing, with a number of providers now putting their top analysts’ skin in the game, which lends more weight to the research when an analyst’s reputation was on the line, and as long as it is properly disclosed there may be a future for it in the marketplace.
2) The price of going virtual:
COVID-19 has changed the way research content and interactions take place and UU 2020 provided a wide range of insights on trends in the marketplace.
-All interactions have gone virtual and as a result there has been a convergence between the price of different interactions. Pre-COVID. The price of an analyst phone call was a different price from an analyst meeting. Now many virtual meetings are catergorised at the lower phone call rate, or catergorised at a virtual rate with the price point significantly lower than its physical equivalent.
-Interactions have soared since lock down with one sell side head of research telling the conference that interactions were up 40% quarter-on-quarter, as COVID increased the demand for analyst time, markets were volatile and portfolios were turned over.
-Intuitively one would expect that payments will increase because interactions have increased. One sell side head of research said overall Q2 wallet was up versus Q1, and other speakers said there was a hope, but not a high expectation, that research payments would commensurate with the increasing levels of interactions. However payments may be constrained by budgets they created pre pandemic. As one sell side head of research noted ‘’It’s too early to know which asset managers had a good crisis. Until we know that, we won’t know how generous they will be – we think it will be tough.’’
-In an unbundled context (primarily the U.S.) one of our broker speakers said whilst high volumes have ensured that CSA balances have gone up research spend had not. So while the budgets were there, that money hadn’t yet ended up in the pockets of providers.
3) Corporate access, and conferences: A bitter-sweet experience
-On one level COVID-19 has been a revelation for conferences and corporate access. By being forced to go virtual, investors and corporates have been pleasantly surprised by how effective the technology has allowed them to be able to continue to interact and stay informed, while the conference circuit, reduced in terms of the number of events, has been able to function with an greater economies of scale that wasn’t possible in a physical form.
-On the flipside, increased participation of events has created a sense of ‘’lack of exclusivity’’, and a perception of less quality and value, according to speakers at UU. Indeed, there was a view that some sell side firms were being greedy by packing their events which risks devaluing the product.
-The challenge going forward is for corporate access vendors and the sell side to tweak the format to build intimacy into the meetings and conferences they coordinate, because there is a belief that while there are efficiencies with virtual, something has been lost in a virtual world and the lack of person-to-person contact.
-Among speakers on the corporate access panel, there was a general consensus that a hybrid model would be probably be the norm when social distancing ends, where 85% of conferences and corporate access would be physical and 15% would be virtual.
-From a corporates perspective that would be welcomed, the ability to gauge an investors body language, or by having shareholders from across the globe in the one room at the same time. While some investors prefer an audio call “we can’t we see the investors’ faces and gauge their body language. I think the future will be a mix of virtual and physical. Virtual doesn’t solve 4 time zones, physical does.’’
4) WFH and the perception of quality
We all know the pros and cons of working from home by now, and the life of an analyst has been a challenging one during the course of Q2. Whilst working from home, the demands from clients has never been higher. So how did they perform? And how are clients valuing the work they do?
-One of our conference sponsors published a white paper that tracked the performance of research providers, which showed that the volume of research had more than doubled over the past 5 months. The paper noted that between the period of 1 Feb – 15 Jun 2020 almost a third of the firms from the sample (32.76%) delivered a positive performance and three in four firms (74.14%) outperformed S&P 500 during the same period.
-From a provider perspective, client interactions were up significantly in Q2, in a range of 20% and 40% versus the same period last year, with one sell side research head saying that investor demand was highest for the most senior analysts, that is, those who had experienced previous bear markets, or liquidity crises.
-But there have been challenges for research producers too. One sell side head said that working from home has been much easier for buyside than sellside, and that creating research in an isolated environment is less than ideal. ‘‘’Are we creating better research from working from home? No,’’ he said. Another sell side speaker commented on the negative impacts of WFH, citing a study that looked at the impact of zoom on the mental state where the impact wasn’t positive. The key takeaway was that non-verbal communication becomes more difficult, and is an exhausting process for the brain.
Has their hard work translated into an increased perception of value?
-One vendor speaker said that there was no clear message from sellside/buyside on paying different price for research when moving virtual. They said measuring quantity is straight forward, but quality is more difficult. One sell side head of research said that the conversation with the buy side had moved to talking about value rather than price and the willingness from clients to pay for high quality advice from professionals.