The way in which brokers conduct and charge for company research given to investment houses is coming under scrutiny following sweeping new regulations introduced earlier this year.
The second Markets in Financial Instruments Directive (Mifid II), which came into force in January, bans fund managers from receiving research from brokers for “free” as an inducement to trade with that broker.
Most brokers now have a set cost for their research which fund managers must pay. Yet others, covering smaller companies, are getting around this by charging the company for the research which they will then distribute to fund managers at no cost to the fund house.
According to a new survey from broker Peel Hunt, this strategy – which many corporates are willingly using in the hope that research on their company will fall across investors desks – may actually provide little benefit to the corporate.
“Unless youre incredibly naive, it is fairly obvious when an analyst is obviously compromised in terms of the recommendation they give and maybe their bullishness about numbers,” said one fund manager in a recent survey by Peel Hunt and the Quoted Companies Alliance, addressing research which has been paid for by a corporate.
Steven Fine, the chief executive of Peel Hunt, added that “corporates must ensure their corporate broker has the ear of the buy side [fund managers] to ensure broad distribution of their investment case”, implying that some brokers may just create research which isn't really read by fund managers in order to win more business.
Yet one senior City source claimed that corporate paid-for research does have further value that may not have been represented in the survey, and that analysts would be unlikely to massage numbers for their corporate clients.
"You'd like to think most people have integrity in the highly regulated environment we operate in,” the source said.
Analysts writing research at any house are regulated individuals. Regulations around inducements are well understood. No one is going to put something out that they dont believe is correct.
The source added that fund managers may have their attention piqued by an interesting note written by an independent analyst, but that they will still want to check with a corporate broker that the numbers are correct.
Neil Shah, director of research at Edison which purely provides research paid for by corporates, added that the fact his business was growing proved that there was demand for this kind of research.
He said Edison had built a strong brand image based on trust, with good analysts that fund managers felt able to rely on even though their work was paid for by the corporate.
Yet he believes the “hybrid model” employed by some brokers, where they will provide independent research for most of a sector but have a few corporate clients, is “deeply challenged”.
Fund managers would be reluctant to speak to a analyst regarding one of their corporate clients, where they could validly receive research for free, in case their conversation strayed into touching on other companies in the sector.
Since these companies would not have paid the broker to distribute research, the fund manager may be found to be breaching the Mifid rules which ban accepting research for free.