Much has been written about MiFID II in recent months, accelerating to fever pitch late in 2017 as the launch date of January 2018 approaches. The second “Markets in Financial Instruments Directive” is legislation emanating from the European Commission designed to regulate (with MiFID I) the operation of financial markets in the EU.
Among other things, MiFID II focuses on the topic of unbundling, the separation of payment streams for different services such as: trading; investment advice (broker research) and the like. This blog post is not the forum for an exhaustive analysis of the whole MiFID menu but one notable segment has great relevance for the markets in general and investor relations teams in particular – research and how it is paid for.
The vast majority of commentary this year has focused on the asset managers (and how they should pay for research) and the broker community (the providers of research and the party most likely to lose under these new rules). Conventional thinking assumes that, as asset managers decide between charging their clients for the research product they buy from the brokers, or paying for that information out of their own revenues, they will become more specific about what they buy and more demanding and results oriented around the quality of that product. Similarly, brokers are confronted with some tough decisions to make: should they continue to cover any financial entity that does not have high volume (attracting commissions) or an exciting story, or any investment banking business coming up? Or, put another way, should they limit their coverage to what they only know they can sell to the investment community?
One party that has been covered less in this developing story is the corporate entity, the listed company that is the underlying product in this heated debate.
Most large companies with global brands will always be the core of a fundamental manager’s portfolio. Similarly, smaller companies that lie in the high excitement, high growth sectors will attract enough interest to warrant thorough coverage. Companies with plans to raise capital will have no problem attracting the Street’s attention either. But the small- and mid-size companies with low turnover and even larger companies in boring sectors will offer a challenge to the sell-side firms which previously covered whole sectors or at least industries, but now have the bean-counters breathing down their neck.
Coverage is already shrinking for those companies out of the headlines as brokers shed staff in response to declining commission revenues. As MiFID II bites, and transparency in how asset managers pay for services becomes mandatory, it is not hard to imagine a system where coverage becomes more selective and broad research devolves to the global brokers alone, while specialist firms limit their coverage to what is hot and what is valuable.
So what can companies do to ensure they receive some coverage even when their market cap. is small, their turnover low, and fund-raising is unnecessary? Whereas many asset managers would be deeply skeptical about self-directed research, it is useful perhaps to think about what broker research actually comprises: substantial amounts of historical financial data provided by the company, overlain by an opinion about the future, created using the analyst’s knowledge and experience about the company, its industry, competitors and market environment.
In a world where asset managers (and even some asset owners) are taking on more of the load of analyzing investment opportunities, the notion of listed companies taking on a heavier burden for disseminating information about themselves doesn’t seem so far-fetched. In fact, they’re already doing most of the heavy lifting and a greater, more organized effort, led by the investor relations team, to provide the investment community with all of the information it needs may be much closer to reality than we think.