Research costs split to hit smaller funds
Managers running small portfolios at large fund houses could be among those hardest hit by moves to separate research and trading costs, specialists have suggested.
Last month, the European Commission published draft rules on dealing commissions, confirming it intends to sever the link between research and trading costs under Mifid II, due to come into force in January 2018.
Under the proposals, asset managers could pay for research themselves or create a separate account for such costs, which are then charged to the end client.
Some firms – Baillie Gifford and Legal & General Investment Management (LGIM) among them – have already taken action in anticipation of the rules.
Previous warnings have suggested smaller asset managers would be hardest hit by the changes, but experts have now emphasised that individual funds may also struggle.
Vicky Sanders and Jeremy Davies, co-founders of research firm RSRCHXchange, claimed niche offerings in bigger organisations would face difficulties.
“The funds with smaller pots of money in a big organisation, such as a credit fund in an equity house, will be most affected,” Mr Davies said.
“Now you can’t cross-subsidise, that credit book is going to have to purchase research itself. That’s going to be a struggle. The banner on your sign isn’t going to get you through any more.”
| Key numbers |
2018: Year in which Mifid II proposals are implemented 10-15bps: The rise in charges for many of LGIM’s equity funds due to it incorporating research costs |
He also noted that, with the prospect of more limited access to research, managers – in particular those such as emerging market and multi-asset managers, who focus on disparate areas – would need to become much more selective in their choices.
“As a multi-asset manager, you can target areas that are hot. If there is a deal in one space, you want to look at that,” he said.
“You come to be very agile when you can’t lock in 100 per cent of your budget. You need to buy research in different ways.
“Greece usually kicks off in May [so managers will take an interest in that]. Everyone needs to be an expert in oil when that crashes. It’s about having that focus and agility.
“People need to get used to playing to their strengths. If you know you can operate in a spot market and pick and choose your moments [to invest], you can do the same with research.”
Some firms are already pre-empting the introduction of formal rules unbundling research costs.
LGIM unbundled commission paid to brokers at the start of April, opting to give each of its equity funds a defined research budget. The costs of these budgets are paid using its fixed “fund management fee” for each product, which resulted in these charges increasing by 10 to 15 basis points for many products.
Woodford Investment Management announced it would bear the costs of broker research itself, as well as disclosing transaction costs each month.
Ms Sanders added that, with Mifid II proposals likely to be implemented differently by EU member states, managers operating on the continent would need to choose an approach. “France may be different from Germany; you will have to adopt the toughest rules,” she said.
She also noted that firms operating internationally would also be affected.
“If you are global and you have to do this in Europe, what do you do in North America?” she said. “That will be the question for two years down the line.”
