Large fund houses slash broker research spend after Mifid II

Budgets ‘down by an average of 30 per cent’ but variations are significant

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Fund houses including Janus Henderson, Amundi and Invesco last year spent significantly less on broker research — when compared with the original forecast by an investment professional association — as the investment industry reacted to higher regulatory costs and increased margin pressure. The second Markets in Financial Instruments Directive, known as Mifid II, which came into effect last year, forced asset managers to separate the cost of research from trading commissions paid to brokers, a process known as unbundling. Virtually all asset managers opted to stop passing the cost of research on to investors and to introduce a new line of cost into their profit-and-loss account. The shift coincided with a tough environment for active fund houses, as choppy markets and investor redemptions depressed managers’ asset bases, causing revenues to fall. Anecdotal evidence suggests that fund groups then culled the amount of research they procured in an attempt to bring down spending. This is borne out in disclosures analysed by FTfm showing the cost of Mifid II for asset managers. Janus Henderson, the $378bn asset manager, said it spent $17m on external research last year. This was down more than a tenth on the $19m it forecast it would spend before the rules came into effect. Hedge fund manager Man Group also spent less. The $112bn group did not disclose its exact 2018 research figure but said it was less than $14m. It had previously estimated spending up to $15m. The amounts are also significantly less than industry-wide predictions of research spend. In November 2017, a survey by the CFA Institute showed that managers expected to pay a median of 10 basis points of assets under management for research each year. This was equal to $1m costs for every $1bn of assets. However, Amundi, the €1.4tn manager, last year spent less than 1bp of its relevant assets under management, which comprise equity and some multi-asset investments. US-based Invesco, which managed $888bn at the end of last year, disclosed a research bill of $28m, while €662bn fund group DWS said it spent €40m on research. Research spend accounted for a higher proportion of smaller groups’ assets. Jupiter, which has £43bn in assets, paid £5m for external research last year, in line with its forecast. This chimes with recent CFA research which found that managers with more than €250bn in assets have cut research budgets more deeply than houses with €1bn to €20bn of assets since Mifid II’s arrival. Although some managers made voluntary disclosures, Mifid II does not compel fund managers to publish research costs unless they are passed on to end-investors. The cost that investors paid before the new rules took effect is hard to estimate because the charges were included as part of trading commissions. Steve Kelly, special adviser at Euro IRP, the trade body for independent research providers, estimated that fund managers’ research budgets had come down by an average of 30 per cent since Mifid II. However, he said the level of research budget cuts varied significantly. One variable is whether a group’s portfolio managers and investment analysts play an active role in defining research spend or whether this decision is primarily made by its chief financial officer. Mr Kelly said one reason for the differences in fund managers’ post-Mifid II research spend was the fact that many groups did not set budgets due to the last-minute adoption of the rules. The vast majority of asset managers only decided to absorb research spend in the second half of 2017. Groups including Janus Henderson, Invesco and Schroders had planned to pass on research costs to investors but backtracked just a few months before the deadline after market leaders JPMorgan Asset Management and BlackRock set the direction for the market by pledging to cover research costs themselves. However, asset managers are expected to increase their research spend in 2019 following last year’s period of adjustment, according to industry observers. In addition, research-hungry portfolio managers at some groups were “pushing back and being more vocal” against spending restrictions set by financial officers, said Mr Kelly.