“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’” -Warren Buffett
With the increasingly competitive landscape of investment research, every buy-side firm needs to be focused on delivering value to clients, regardless of whether or not your firm is impacted by MiFID II. As Scott Rosen, CEO of Visible Alpha, said in Markets Media, “MiFID II’s unbundling requirements have greatly accelerated the pace of change in the institutional research business, however, even without MiFID II, increased competition, tight budgets and a heightened focus on quantified value of research have also been forcing structural changes in the industry.”
Let’s start with MiFID II and how unbundling research is changing the institutional research business. The new European regulation requires that asset managers have an investment research valuation methodology to ensure that the amount they pay for research is commensurate with the value they receive from it. As Rosen says, this includes quantifying the value of research, which is often done with rate cards and a provider evaluation. While implementing an investment research valuation methodology is a requirement for firms directly impacted by MiFID II, as the regulation continues to play out over 2018, the effect of the regulation may become further reaching.
Consider this scenario: Investor A is working with Firm A, a global asset management firm now operating under MiFID II; therefore, Firm A has implemented an investment research valuation methodology and can point to the research reports, analyst models and corporate access events concretely contributing to alpha. Meanwhile, Investor B is working with a U.S. asset management firm – Firm B – that is not impacted by MiFID II and has decided to continue operating solely based on U.S. regulations. Investor B has limited insight into what research has impacted Firm B’s investment decisions. Investor B discovers Investor A does have this insight, feels like they should have access to the same insights...and, well, you can guess how this plays out.
The point is that due to MiFID II there is increasing pressure for all buy-side firms to provide more clarity into the investment research they are consuming and how that is impacting performance. Tracking and quantifying the value of sources of alpha is important. Plus, having an investment research valuation methodology in place is not only valuable for clients, but it’s valuable for you, too.
Learn how to create an investment research valuation methodology
Now, let’s examine the second half of Rosen’s statement: how increased competition and tight budgets have also been forcing structural changes in the industry.
While there isn’t a clear way around the competition and limited budgets, there is some high level advice that can potentially lead to fruitful outcomes.
As the investment research landscape continues to evolve, be flexible and alert. Stay abreast of the latest technological advances in investment research, such as ones that make analysts more efficient. Consider subscribing to blogs (like this one!), attending educational webinars, and listening to professional podcasts to learn about new tools and techniques.
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Regardless of industry, transparency is important to clients. How do you provide transparency to clients? What information is provided? Do they have clear insight into your investment ideas and process? If you understand how your client measures success, you can then take the steps needed to achieve that success.
The industry is also focusing on innovation this year, which is in line with discovering new sources of alpha. While it’s still important to innovate, it’s important to do so in a process and metrics-driven way.
While competition is increasing and budgets are constrained, what is your firm focusing on to deliver value to clients?
Learn how Visible Alpha can help you redefine your investment research experience.