Asset managers are focusing on costs and value, and in turn are not prioritising investment research budgets as the prospect of rebundling looms, a new buy-side study by Substantive Research has found.
As a result, in 2023, asset managers are consuming increasingly more from their core bulge bracket providers as they aim to be cost efficient and manage budgets in what has turned out to be a challenging market environment for active managers.
Speaking to The TRADE, Mike Carrodus, chief executive of Substantive Research, explained: “The challenge is that whilst these proposed freedoms may well help the market evolve over the longer term, right now asset managers are in a ‘watch and wait’ mode which will hinder any potential short-term benefits.”
As well as budgets for investment research decreasing, a trend of concentrating in the largest, bulge-bracket providers, continues according to Substantive Research, with payments to the top ten brokers in the average research budget increasing by 0.7% since 2022 – now at 54.6%.
Carrodus further told The TRADE: “Our data shows why HM Treasury was keen to address the situation – the market works well if you are a large asset manager or a bulge bracket broker, but times are very tough for those who are further down the food chain.”
The newest findings highlighted the current state of broker research pricing, supply and market share, looking at the state of play in light of the UK’s recent Investment Research Review.
The study explained that the review had “inspired hopes that “rebundling” of research and execution next year could reverse the post-Mifid II decline in research budgets and encourage greater coverage of small and medium-sized enterprises (SMEs)”.
However, investment research budgets have slipped despite this, according to the study, with the average research budget having fallen 6.5%.
Read more: Substantive Research launches research dashboard for asset managers
Speaking in an announcement, Carrodus suggested that were they able to do so without any adverse consequences, asset managers would opt to take away the cost factor when it came to external research, and thus remove any downward pressure on their budgets.
He added: “But the ability to rebundle trading and research will fundamentally depend on commercial dynamics, not regulatory ones, and it remains to be seen whether the appetite exists amongst the buy side to open this conversation up with clients in the current tough market environment.”
Looking forward, the study explained that eyes are looking towards the UK Financial Conduct Authority’s (FCA) consultation paper which will highlight proposed changes, with the potential for both buy and sell to seriously revise their processes and negotiate price and access under a new framework.
Read more: FCA eyes first half of 2024 for revisions to UK research rules after Mansion House announcement
Carrodus said: “Brokers encouraged by imminent regulatory changes may be surprised at how tough negotiations are this autumn – asset managers aren’t changing processes until they get much more clarity, and in the meantime, budgets are once again under pressure.”
Elsewhere, the survey addressed the impact of M&A on research pricing since Mifid II. It found that acquired brokers pricing decreases an average of 6% in the year following an acquisition, while independent research providers only seeing a 1.8% decrease under the same parameters.