Have we at last reached the year of change? We have certainly been talking about looming upheaval in equity research for long enough, whilst changes have already supposedly taken place in the world of corporate access, although the full extent of how that may develop has definitely not yet materialised. You can hear the yawns in a roomful of IRO’s even before the dreaded MIFID ll phrase has been mentioned. But have we really thought through what these changes may bring and how that could entirely change the landscape in terms of the information available in the market, for both small and for large companies?
The upcoming European MIFID ll regulation changes (wholly supported by the FCA) mean that it will no longer be possible for costs of research to be included within execution fees and all asset managers will have to explicitly pay for research, either out of their own budgets (as some have already declared they will do) or out of research payment accounts and the fees must then be transparently declared to their own clients. The main corollary of all this which has been dwelt upon at length, is that the amount of income generated from sell side research will fall significantly and possibly dramatically. Thus it is now widely anticipated that the arrival of these new rules will result in a diminution in the number of sell side analysts at the investment banks as well as reduced coverage for many listed companies.
The other important consequence of these changes has been less widely considered, but potentially will yield the biggest change. Research will finally have a transparent pricing model, crucially allowing new entrants into the market. So in addition to the anticipated increase of paid for research products (especially for smaller companies), we may start to see more independent research from respected individuals and new start up firms as well as reports from management consultants and even the big 5 accountancy firms. Potentially still a lot of information around, but its an unknown quantity at this juncture as to how much of that will or will not be available to the wider market or only those willing to pay. And this is an important distinction. It’s not new to have commissioned private research within the investment arena – hedge funds have been following this policy for years. But it is new to have this far broader and less well publicised group exerting a much more widespread and immediate influence on investors and the development of the investment case. And it will be a step change for most companies in their IR communication with analysts / researchers, where the vast majority of their efforts have historically been with the sell side analysts, and where it seems that emphasis may have to make a radical shift to a much broader audience.
What will this communication look like? It could range from simply a much longer list to invite to analyst presentations and capital markets days to a wholescale change in the way companies interact with the investment community and difficult choices to make as to how to best utilise their resources to reach and to influence an increasingly disparate group of observers.
And the shift doesn’t stop here. Research published over the weekend from the latest annual Edelman Trust barometer states in relation to business “There is evidence of even further dispersion of authority. A person like yourself (60 percent) is now just as credible a source of information about a company as is a technical (60 percent) or academic (60 percent) expert, and far more credible than a CEO (37 percent) and government official (29 percent).” So in addition to changes in the financial communication, companies also face huge challenges in establishing and reinforcing their overall reputation and credibility. No doubt the reason why we are seeing a significant focus on employee engagement as the best source of positive commentary about a business.
In many ways it seems investment research is developing along the same lines as many other markets – content will be king and the breadth of sources creating that content will grow. Determining which are offering high quality and influential output and finding the most effective ways to communicate with those individuals or groups, could become the raison d’etre for IR.