Will Mifid II lead research providers to start new funds?

Jan 03, 2018
Some research providers to compete with clients in bid to create new revenue stream or prove their capabilities

With Mifid II slated to be rolled out today, the question many research providers are asking is how they can prove their worth to buy-side clients that now need to justify their research spending. While many are taking different approaches, a few research firms are trying to prove their stock-picking ability by launching funds, exchange-traded funds (ETFs) and other investment vehicles based on their research calls.

According to an article published by Bloomberg, quantitative research firm Libra Investment Services (LIS) initially garnered accolades as one of the top European contributors to a well-known alpha capture system. Consequently, the firm set up LSA Equities and raised $30 mn to manage funds based on the same research it sells to clients. LSA has produced total returns of 22.4 percent since its inception in October 2015 through November 2017, compared with 14.9 percent for the Stoxx 600 Index over the same period.

Venice, Florida-based Ned Davis Research (NDR) has decided to aggressively pursue the creation of ETFs and other investable products based on its research. NDR has partnered with Guggenheim Investments to launch a series of thematic unit investment trusts, with VanEck to create an open-end mutual fund, and with registered investment advisers Global View Capital Management and Carson Wealth Management to provide its models as tactical asset allocation overlays to their money management operations.

Bloomberg reports that independent French firm AlphaValue has launched a basket-traded fund for one of its insurance clients that will be managed by AlphaValue’s investment committee. The fund has returned 3.47 percent since it was set up in May, compared with a fall of 0.73 percent for the Stoxx 600. AlphaValue has additional investment products in the pipeline based on customer demand.

Macro strategy research firm Ekins Guinness has recently launched a Ucits (undertakings for collective investment in transferable securities) fund called the TB Enigma Dynamic Growth Fund, which invests in a portfolio of ETFs based on the allocation strategies developed by Ekins Guinness. Ekins’ research methodology combines valuation models with momentum metrics to develop model portfolios at the asset level as well as by region and for UK equity sectors.

According to Bloomberg, New York-based sell-side firm Bernstein recently launched US and global ETFs that track stocks rated ‘outperform’ by the firm’s research analysts. It wants to demonstrate that its in-depth fundamental research and quantitative model add value to active management at a time when passive strategies are enjoying greater inflows. The US ETF has returned 6.02 percent since it started in October, beating a 4.55 percent gain for the S&P 500 Index over that same period. The global fund rose 2.44 percent compared with a 2.52 percent gain for the FTSE All World Index over the same period.

Other independent research firms such as CFRA and MarketGrader.com have recently launched various indices based on their research. These firms are looking to provide these indices as part of their research product, license them to asset managers that can manage client assets around them, or launch a series of ETFs based on these indices.

Each of these research firms has decided to find new ways to be compensated for its stock-picking abilities because they doubt they will be paid appropriately in a Mifid II environment. In most of the cases mentioned above, these firms have chosen to compete with their research clients – either as a way to create a new revenue stream or to prove their capabilities to asset managers looking to use their research in their own investment process.

The big question is whether these firms can maintain their focus on producing high-quality research while also gathering enough assets to make this strategy work. We will keep an eye on this developing trend.

Mike Mayhew is chairman and principal of Integrity Research Associates, an advisory firm focusing on the analysis of the global investment research industry

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