Asset Management

Rules Squeeze Research, But Data Rises For Wealth Managers - Carillon Tower Advisers

Tom Burroughes Group Editor August 19, 2019

Rules Squeeze Research, But Data Rises For Wealth Managers - Carillon Tower Advisers

This publication talks to a US firm for how sell- and buy-side research around the world - not just in Europe - is being hit by new EU and other regulations and how, even so, sources of data for investors are also increasing.

The European Union’s MiFID II directive regulating investment and financial services kicked in at the start of 2018. One of the largest directives to take force in the bloc for years (more than 30,000 pages), it is designed, so its framers say, to protect investors from mis-selling and to ensure that they are not put into investments that do not suit them. As part of this general goal, it is designed to open up the costs and charges that financial intermediaries impose. Hopefully this will increase value for money and stop clients from being ripped off.

That’s the theory. One of the concrete moves has been to make money managers unbundle the costs for researching the vast array of companies they invest in. By separately itemising the cost of doing this, such a move is designed to shine a light on what investors really pay for investment.

This “unbundling” process did not start with MiFID II but it has accelerated in the EU. One effect, as this publication is told by UK-based brokerages such as Peel Hunt, is to squeeze the amount of sell-side research on companies. Small- and medium-sized firms aren’t as widely covered as a few years ago. And this cut in coverage reduces liquidity and increases volatility in some of these firms’ shares, practitioners say. Ironically, at a time when fund managers like to shout about their commitment to environmental, social and governance-themed investment, the ability to adopt ESG strategies gets harder if the supply of research into some firms is cut. (This publication has noted this paradox here.)

Another issue is that like so much legislation these days, it does not halt at the national or transnational border. MiFID II affects firms outside the bloc if they trade and invest in European businesses. A fund manager in Chicago or Hong Kong is potentially in the crosshairs of MiFID II. (Just as, to take another example, they could be affected by the data protection legislation, aka GDPR, that the EU introduced last year if they interact with European entities.)

There’s a lot to think about here. This publication recently interviewed Cooper Abbott, president and chairman of Carillon Tower Advisers. The US firm, part of US-listed Raymond James, is a global asset management firm. We asked Abbott about what MiFID II has done to the industry so far and what he predicts lies next.

From the firm’s POV, how serious is the downward pressure on the availability of sell-side research in the US and EU at the moment? Are there differences between the US and EU in terms of such availability?
There appears to be a wholesale deindustrialisation of investment research on both the sell and buy sides. The number of analysts covering companies has been steadily declining, most noticeably in the small-cap, mid-cap and emerging markets spaces.

As research-focused, active managers, we believe that having fewer participants makes our capabilities even more valuable. And given where we are in the investment cycle, the opportunities to leverage high-quality fundamental research are becoming even more compelling.

MiFID II has been an issue for research in the EU, but what sort of changes have been squeezing it in the US and why?
One of the unintended consequences of MiFID II appears to be a decline in the availability of research. While this means there is less information available to the investing public, and research capabilities are more scarce, the ability to perform such research is more valuable.

While MiFID II is an EU framework, many firms in the United States are starting to adopt approaches of research unbundling. This has led to a decline in sell-side research, and often downsizing or shuttering of sell-side research firms. There’s been an incremental decline in buy-side research as well, with mergers and team wind-downs.

Is this part of why so-called “passive investing” is more common because of the process of tracking stocks, such as small- and mid-caps, is more expensive and difficult today?
I would love it if Carillon Tower Advisers were the last active manager on the planet. We think that the opportunities available in under-covered companies, as well as where we are in the investment cycle, create a unique environment for fundamental, analysis-based, active investment portfolio approaches.

With a declining number of managers, we think that a research-intensive process will benefit from having additional information in a market that becomes less efficient.

Active management helps provide price discovery, keep markets efficient, and challenges misallocations of capital. Our view of active management helps clients achieve their goals – and brings an ownership mentality – supporting the overall health of investment markets.

How does the research squeeze affect the drive for ESG, given the need for lots of data? Isn’t this going to cause problems for ESG?
ESG is an area where fundamental research is heavily beneficial and truly rewarded. Managers who know the unique characteristics of individual companies, their competitors, their suppliers and their industry are well-positioned to provide unique insights on the way individual management teams are responding to ESG issues -- where they are doing a good job, where there is room to improve, and how they stack up versus others.

Despite the intense focus on ESG, it’s still relatively early in its development, which means there are few standards. This creates an opportunity for clients and active managers who are dedicated to this space, both to try to outperform and also – as owners – to have a real chance to effect change. For managers that do not invest in the appropriate level of research or data, a dedicated approach to ESG will likely fall short.

Are new business models arising to try and fill the research gap? Might new technologies help in this regard? Are gaps in research also an opportunity for some kinds of investors? What is your firm doing in this area of research?
While there’s been a consistent decline in buy-side and sell-side research, we’ve also seen a growth in the total amount of data available for asset managers. The quantitative data available today is unprecedented. And as this kind of information becomes cheaper and more ubiquitous, insight and experience become more valuable.

One should not confuse the availability of data with the importance of true fundamental research and analysis. The real value comes from closely following companies and management, and having the experience to interpret and implement information. It has proven to be a successful approach in terms of both outperformance and meeting the unique needs of specific clients. All of Carillon Tower Advisers’ affiliate teams are research-based, and we consider it vital to our investment process.

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