First published in Tabb Forum, 22 September 2022
As asset managers head into budgeting season, there are 5 key issues driving the investment research market right now that will impact research spending decisions, from regulation, to ESG needs and potential consolidation among providers. Here are the main points asset managers and their research procurement teams need to consider as they look to secure their investment research for 2023:
- The SEC has ensured that regulatory complications in this market are back with a vengeance. By announcing that they would not extend the no action relief that allows European asset managers to pay American brokers for research in cash, the SEC has created a massive headache for both the buy and the sell side. Post-MifiD II, most Europeans pay for research in cash, but from July 2023 they’ll have to pay US brokers exclusively through trading. Despite initial hopes to the contrary, there’s no easy fix – brokers becoming investment advisors creates further complications on what can be included into a research service, there’s zero appetite from the buy side to change research funding and payment structures, and even if compliance departments allow European clients to pay US brokers’ entities in Europe for their global relationships, that still means they would have to cut the brokers who don’t have a presence there.
- Budgets will be down again in 2023. This will create the most adversarial negotiation cycle between research providers and asset managers since MifiD II came into effect and changed research pricing and valuation. During Covid, brokers eventually accepted that high numbers of Portfolio Managers joining virtual calls wouldn’t necessarily ensure bigger overall payments, as everyone figured out how to deliver value online versus in person. But this time around, the market has been volatile and brokers feel they have been leaned on heavily by clients for insight and expertise, which should merit appropriate rewards. However on the other side of the fence, the buy side is dealing with a pretty miserable year, and a strong need to be as efficient as possible. Research valuation processes are more mature now, but they will be properly tested this winter!
- ESG Research and Data demands are maturing. Having created initial ESG-driven processes internally and subscribing to a couple of incumbent data providers, the focus from the buy side begins to move on from gathering assets to running this money credibly and sustainably, so asset managers are looking for differentiated inputs that can drive competitive advantage. However regulations and client preferences push asset managers into the same providers and processes – gaining traction as a niche provider will be tough within these conflicting market forces, but for those that do there will be significant reward.
- Modern research products need to be aligned with increasingly data-driven investment processes in order to retain and grow market share. Consumption habits and demand are changing fast, and in 2023 we will see budgets materially reflecting this key trend. The long-only world is grappling with the challenge of how research and data budgets should be delineated and administered, and a more holistic view of both budgets will be increasingly important to make sense of it all.
- Market supply is now in danger, and early 2023 will bring further consolidation. The market is still clearing on both sides of the Atlantic after 5 years of price deflation – business models are being tested, and because there are pockets of excellence spread around multiple providers this creates supply risk. Concentration of research budgets amongst the largest providers ensures that the bulge bracket firms can reinvest in their breadth and depth of coverage, but for those trying to keep broad coverage while being “have-to-have” in one or two areas, there may be tough decisions ahead.
Diversity of research is still suffering. The bulge-bracket brokers that have stuck to robust pricing structures and taken the opportunity to grow teams with quality analysts are seeing the rewards in terms of market share. But there is still opportunity for differentiated providers that align with the evolving demands from asset managers, for example the increasing focus on the integration of data into their research and investment processes.
We will be discussing all these points at Unbundling Uncovered, where over 30 distinguished industry speakers will debate these issues on November 9th at the Institute of Directors in London. See you there!