Mifid II leads to exodus of sellside analysts

Fund managers criticise deteriorating quality of research

Heavy hitters in the investment industry have deplored the exodus of sellside analysts, a trend exacerbated by new EU-wide rules. The introduction of Mifid II in January required investment banks and brokers to separate the cost of research from trading activity offered to asset managers. It had been expected that it would prompt more analysts to leave the industry and this was happening, said several fund managers. “We are seeing attrition of good analysts from the sell side,” said Richard Buxton, chief executive of Old Mutual Global Investors, the £28bn fund company, at the UK’s Investor Relations Society annual conference last week. “The quality of research is getting thinner and thinner.” He said his company was “inundated with CVs from sellside analysts” looking to move out of an industry suffering falling revenue. John Bennett, director of European equities at Janus Henderson Investors, the £265bn fund group, also spoke at the event. “The quality [of research] is coming down and I see much more focus on whether companies beat or miss quarterly targets. The dialogue about where the company is going to be in five years is falling away,” he said. “If the sell side does deteriorate then we will have to hire more analysts ourselves.” The conference was told that 157 sellside analysts had left the industry in the past two years. Many had taken jobs at asset managers and as investor relations professionals. The Mifid II requirement has led asset managers to be pickier over research. Providers have also struggled to decide appropriate charges, while Mifid II’s rules on inducement make investment companies wary of accepting cheap or free research. As a result, the Financial Conduct Authority, the UK’s securities regulator, said last week it would investigate how the reforms to research payments were bedding in. The decline in research is especially steep for analysis of smaller companies. Matthew Siebert, a small-cap fund manager at Tosca, the £4bn investment house, told the IRS conference that half the companies in which he invested had either just one analyst or none. “The Aim has been a huge success,” he said, referring to the London Stock Exchange’s trading platform for small companies. “That is at risk if we do not get [independent analysts] shining a light on the good and the bad.” The quality of some of the small and mid-cap research is shocking Judith MacKenzie, Downing The shrinking pool of analysts was also discussed at a London fund industry gathering last week, hosted by Alma PR. “Week by week we are seeing large investment banks cutting back on research output and sales staff,” said Alan MacDonald, head of equities at Panmure Gordon, the stockbroker. “The adjustment process is painful. We can’t afford to see reductions in small and mid-cap research, which can happen in the large-cap space where there is significantly more analyst coverage.” His comments were echoed by Judith MacKenzie, a partner with Downing, a London investment boutique, who said that since the introduction of Mifid II, the average number of analysts covering UK-listed companies with a market value below £150m had shrunk from 0.8 to 0.6. The average number of analysts covering larger companies was 8.9, she said. “The quality of some of the small and mid-cap research is shocking,” added Ms MacKenzie. “We hope that will change as asset managers are compelled to think more deeply about the value of the research they buy.” Another speaker, who did not want to be named, said: “An investment bank that originally quoted £40,000 a year for all their research later reduced that to just £500. What does that tell you about the quality of their research?”