Buy Side Sees FICC Research Glut

Shanny Basar

Asset managers are using fewer research providers for fixed income, currency and commodities but said this is not having a negative impact on returns, highlighting a potential oversupply.

The asset management and investors council of the International Capital Market Association released the second annual AMIC FICC research unbundling survey last week. The survey was aimed at buy-side firms and focused on FICC research only.

The majority of respondents, 82%, said they are using a smaller number of research providers, with the remainder making no change. Last year’s survey had predicted that 83% of respondents expected to use a smaller number of providers and 13% expected no change.

ICMA said in the report: “The majority of asset managers are confident that the reduction in the number of FICC research providers does not have a negative impact on their funds’ performance. 86% of respondents said they are not concerned about this scenario, showing a potential oversupply of research.”

MiFID II, the regulation which went live in the European Union this year, requires fund managers to either pay for research themselves or set up a research payment account, where the budget has been agreed with the client. Most asset managers have opted to absorb research costs, which has led to a drop in research budgets.

In addition near all fund managers, 86%, said the quality of FICC research has not changed. Last year one third had said they believed research would get worse following the MiFID II rule changes.

The ICMA survey also found that the number of asset managers who are paying for research themselves has increased since last year. This year’s survey found that 79% of firms pay for FICC research from their P&L, up from 67% last year. However, respondents who are unbundling research fees globally has fallen from 64% last year to 35%.

“The significant change in firm attitude to the business segregation model may reflect that the costs and complexities of segregating their businesses geographically outweigh the costs and complexities that come from unbundling globally,” added ICMA.


In equities, brokers will be earning about 20% less on European equity research by the end 2019 as a result of MiFID II, a drop of about $300m (€265m), according to a survey from Greenwich Associates this month.

The consultancy said in a report, MiFID II at the Midpoint, that the largest European institutional investors cut budgets for external European equity research by 19% this year. In addition investors are planning another 5%-6% reduction next year.

William Llamas, Greenwich Associates

William Llamas, Greenwich Associates institutional relationship manager, said in the study: “With the massive decrease in 2018, the worst is likely over. However, given the smaller research pool, investment banks and other providers will continue to fight for every last dollar, and success will be defined as ‘almost’ capturing the same revenue as in pre-MiFID II times.”

Neil Scarth, principal at Frost Consulting, has been building a research spending database/benchmarking product – FrostDB. He found that managers using client money to pay for research spend more far more, as much as 100 times more, as fund managers who pay for research themselves. However, he argues that cutting spending on research may be a false economy if returns then fall.

Scarth told Markets Media this month: “Asset owners may pay between three and five basis points, for instance, but the difference in return between the first and fourth quartile of funds can be thousands of basis points over time, depending upon the strategy.”

Neil Scarth, Frost Consulting

He added that the discussion between investors and research providers is evolving as the performance implications of cutting research budgets may become clearer over time.

“Asset owners and fund managers both want the fund to do well in generating returns,” added Scarth. “So thoughtful asset owners may prefer to agree a research budget in order to give the managers the tools they need to run the strategy, particularly given the large spread between research costs and returns.”

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