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Analyst research is predicted to cost a median of $10m for every $10bn of equity assets an investment manager runs, according to a study that showcases the large bills facing fund houses when new European rules come into force.
The rules will force asset managers to split out the cost of research, which is used by portfolio managers to help make investment decisions, from the cost of buying and selling securities.
According to a survey of 365 individuals from 330 asset managers and other investors across Europe who were involved in using, producing or procuring investment research, the median cost of equity research is expected to be 10 basis points, or 0.1 per cent, of assets under management a year.
The figure is far more than the estimated 1bp research cost some asset managers, including Man Group and Jupiter, have suggested in recent months. It would equate to a €2.6bn research bill for the €2.6tn that Morningstar, the data provider, says is currently managed in active equity mutual funds in Europe.
Rhodri Preece, head of capital markets policy for Europe, the Middle East and Africa at the CFA Institute, the global association for investment professionals that carried out the study, said there was still huge uncertainty for asset managers when it came to the cost of research.
“Price negotiations are ongoing,” he said. “[The costs] will vary according to the strategies and bargaining power of the asset manager.”
Jamie Carter, chairman of New City Initiative, a group of independent asset managers, said the numbers suggested by CFA members tallied with what he expected, but there are concerns among some fund houses about how research costs would hurt profit margins.
“The costs have been coming down; brokers have been refining prices. There is now more sensible pricing,” he said. “[But] research is still a high cost. The lower your assets under management, the more difficult it is [for the fund house].”
Earlier this year, Oliver Wyman, the consultancy, predicted the additional costs imposed by the Mifid II regulations could lead investment managers to cut spending on research by about $1.5bn.
That figure could rise to as much as $3bn in the event of a price war, the company suggested.
The survey by the CFA Institute found that half of those polled suggested equity costs would range from 5bp to 20bp. Respondents expected to spend much less on fixed income, alternative and quant research.
Joshua Maxey, managing director of Third Bridge, a research company, said an analysis by his company suggested that the cost of “plain vanilla” research has come down recently, and is likely to “fall closer in the 5-8bp range”.
But the costs could be as high as 15-20bp for specialist research, he added.
Dominic Johnson, chief executive of Somerset Capital Management, the emerging market fund house, added the industry was still trying to figure out how to price research. “The market has not really established what research is worth yet. Maybe in a year or two’s time, the market will settle down and price more accurately.”
The CFA study also found that although the introduction of the rules is just weeks away, a fifth of asset managers have yet to decide whether or not to cover the cost of research from their own profit and loss account or pass it on to investors. Smaller asset managers are more likely to be undecided, according to the CFA, suggesting they were less able than big asset managers to take the profit hit that absorbing research will entail.
Many larger asset managers including Candriam, Ashmore, Lyxor and Pictet have also yet to announce how to pay for research despite the looming deadline.
Vicky Sanders, co-chief executive at RSRCHXchange, a research platform, said it was “very late in the game” for companies to be undecided. “We are witnessing an industry-wide stampede to be ready in time,” she added.