Mifid II rules have pushed investors into large cap shares and caused them to miss out on better value smaller cap options, according to Neil Goddin, who runs three equity funds at Kames Capital.
Under the Mifid II rules, investment firms will no longer be able to accept research for free unless a fund house can prove that the information passes the quality enhancement test.
Mr Goddin said the new rules have displaced the business models of many research brokerage firms, which previously would have bundled the research cost with the fee they charged for executing trades.
Mifid II has hurt the profitability of smaller research departments and has also made it tougher to win equity trading business that would previously have been bundled with their research.
As a result, Mr Goddin said those businesses are now less focused on covering smaller companies, and instead are trying to build business models based around marketing the shares of the very largest companies, as a contract to work on such deals generates far more revenue than would be the case from selling research to fund managers.
Large cap companies issuing new stock tend to do so in the millions or billions, so research brokerage firms that win the rights to sell those shares can earn substantial fees.
Mr Goddin said: "The Mifid rules mean the whole of the sell side broker industry is now set up to work for large cap companies, in the past this was not the case.
"There are many companies that are small cap, but represent great opportunities. A lot of funds are invested in the same stocks, while we think there are attractive options away from that."
Minesh Patel, an adviser at EA Solutions in London, said the impact of the Mifid rules was still becoming apparent in the industry.
But he said the requirements for firms to pay for research could narrow the opportunities for advisers in lots of ways, with some smaller funds unable to pay for research and so not seeing the full range of companies.
At the same time he questioned whether funds which can't afford to pay for research should exist.
david.thorpe@ft.com
