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Apr 24
0

Smartkarma Reaches News Heights

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20170424-everest-with-Dr.-Paul-Kitney

The way we work and interact with each other is arguably the most profound revolutionary change any of us will experience in our lifetimes. It promises to reshape cities, transportation systems, communications, entertainment and workplaces.  The seed of this revolution was planted more than 25 years ago now, perhaps when the public first started to “get connected”.

We would suggest that the real impetus for the most profound change of all, the change occurring all around us right now, is much more recent, requiring the birth of high speed wireless data transfer (4G and beyond) to really kick it in.

Suddenly, access to, and the creation of, sophisticated online shared software and services, available “anytime & anywhere” became possible.

It was against this backdrop that we started to imagine Smartkarma as research analysts and their clients would be natural users of such technology. We knew from experience that they are constantly on the road, searching out and investigating the most compelling investment ideas, meeting companies and kicking tyres. Analysts surely needed to be able to work flexibly and their clients surely need seamless “anywhere” access to their most compelling ideas?

At its core, that is exactly what Smartkarma does. Our cloud based platform provides analysts all the tools they need to research, collaborate, communicate and publish their work. It provides our subscribers a way to discover, read and interact with this work and with the analysts, providing them instant and seamless access to the most relevant insight, as, when and where needed.

Dr. Paul Kitney, the former head of Strategy for Blackrock, and now publisher of the esteemed “Animal Spirits” report on Smartkarma, has surprised us all by taking Smartkarma to new heights…literally!

He just published his latest work “Animal Spirits Report: Dodd-Frank, Corporate Bond Market Liquidity & Macro-Financial Stabilization”  from Mount Everest base camp as he prepares for his ascent of the famous peak in the coming weeks.

This lead to a real moment of reflection for all of us at Smartkarma.  The realisation that we have developed a whole new career path for top analysts: an easy and efficient way to build an independent research business; the flexibility to do so in a way that fits around our personal dreams and aspirations, whether mundane or truly remarkable, like the ascent of the world’s highest mountain, Everest.  Amongst the constant schadenfreude laden news of shrinking research budgets and big bank layoffs this is a glimpse of the future. The dawn of a new and better industry designed from the ground up for tomorrow.

We at Smartkarma are excited to play a small part in Paul’s journey to Mount Everest. Almost 65 years after the first successful ascent of Mount Everest by Edmund Hillary and Tenzing Norway, it’s hard to imagine that our modern age now allows for wifi connectivity in the remote Himalayan mountains.  Smartkarma is proud to provide a platform that supports flexible working and the achievement of lifelong dreams. 

Onwards and Upwards!

Mar 24
0

Smartkarma receives independent third party validation from Celent – Research as a Service is the future!

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Independent research house, Celent, has recently published a report on MiFID II, research unbundling and the future of investment research.

In the report, John Dwyer, Senior analyst at Celent evaluates the current provision of investment research and what the future may look like. Vitally, his focus is not on the problems associated with trying to “fit” the existing research industry into a post MiFiD2 world, but how the industry will innovate and change.

John details the powerful part that platforms will play in the future of research, as incumbent providers with legacy systems become less and less relevant. “It is the insight rather than the power of the voice which should determine the value in the marketplace….. the fragmented future of research will embody a P2P [peer to peer] structure.”

Other factors are also in play that will help transform the investment research market at a global level. Asset managers competing for global business will have to demonstrate the same levels of transparency as their European counterparts, and will have to make changes to how they access research. Alongside the regulatory push, there are significant political, technological and economic changes occurring globally.

This brings new challenges for market participants demanding clear perspectives regarding capital allocation. As John says, “for active managers in an unbundled environment, research access may become a critical driver of absolute and relative performance.” Timely, independent and useful insight is ever more important.

Research as a Product Vs Research as a Service

From the beginning, Smartkarma has forged its own path. This has been driven by our belief that bringing real, lasting and positive change to the research industry requires an entirely new business model and an entirely new culture; a complete overhaul of how the industry operates and prices, from the ground up.

Anything less is simply providing a bandaid solution to the “problem” of regulation.  As Celent notes, “regulation is merely the catalyst to resolving pain points which have existed for a long time”.

We are surprised and excited to see Celent recognise and validate this unique and fundamental difference in Smartkarma’s approach, coining the phrase “Research as a Service” or RaaS to delineate us from the other platforms; the “Research as a Product” (RaaP) marketplaces.

Celent sees the many benefits of a “Research as a Service” model:

  • Subscription-based pricing providing end users access to all research.
  • Native publication of research reports permits contextual delivery to end users as well as maintaining quality and ensuring independence.
  • Accessing the long tail of analysts offering uncorrelated insights.
  • All analysts are jointly incentivised to collaborate and to enhance the intellectual capital / substantive nature of the research on the platform.
  • Increased potential for differentiated alpha and network effects.

The RaaS Virtuous Circle

RaaS

Societe Generale – A Milestone?

In recognising the power of our unique business model, and the substantial role that P2P platforms will inevitably play in the future, Celent also recognised the bold step that Societe Generale has made in partnering with us.

Celent suggest that this agreement “may come to represent a key milestone in the evolution of investment research”.

You can read more about our partnership HERE.

We are creating a bright, yet radically different future for research. We are proud to be joined on this journey by our growing community of visionary Insight Providers, clients and partners.

Jan 13
0

Investment insight 2017: MIFID II and new approach in the research industry

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There will be some big changes ahead for the capital markets industry, stemming from changes in the research industry in 2017. Not only will the creation, distribution and consumption of research evolve, but this will cause changes in the underlying infrastructures of investment banks, brokers and asset managers too. Unbundling research from trading commissions is a necessary requirement of MiFID II, due to come into force on January 3 2018. And in doing so, this unbundling and move away from cross-subsidisation will impact other areas of the business, such as ECM and corporate access, market making and flow trading.

MIFID II will be a key agent of change for the research industry, but it is not the sole driver shaking up what has traditionally been a fairly static sector. There are other reasons behind the restructuring of the provision of research. Some banks, which are under continued regulatory pressure, are closing their research departments, or focusing coverage on top tier clients only, as they search for more profitable cost centres. Others have downsized, or in investment banking terminology “juniorised” their research and distribution teams.  A recent report by Quinlan & Associates estimated a 25-30% reduction in global research spend by 2020.

In some instances, this has impacted coverage, with depth and breadth compromised, as the output focused on the more profitable large cap sector has come at a cost to coverage of small and mid-cap firms. Coverage of less fashionable stocks or sectors has also been impacted, so if they do have a renaissance, there may not be adequate insight about them, thus impeding their growth potential.

On the sell side we have also seen banks look at new, innovative business models with vendors. For example, Societe Generale will now provide Asian research via an online, curated platform from fintech start-up Smartkarma. Other market options include a la carte purchasing solutions, auctioning of analysts’ time or subscription plans, to highlight a few.

For asset managers, these changes also require more complex tools to evaluate research and set budgets, and who pays for it. Some of the larger firms have built up their research teams internally, but many are using this change to focus on some of the underlying issues they face with research. For example, asset managers are looking for ways to overcome the daily information overload that they experience, with ever greater portions of their day wasted trawling through insight that is not suited to their need, nor timely. A PDF document is only as fresh as the day it is created and many people are looking for ways to get closer to the analysts and get real time, demand-driven insight. This need is ever greater as the prolonged interest rate environment is pushing them to look for innovative ideas to generate alpha.

Independent analysts are the least likely to be negatively affected by the shifting landscape. New distribution platforms have emerged that are offering solutions that run from publishing to distribution and efficient monetization of work. Many of the analysts and insight providers themselves are looking into new ways of collaborative working, wanting a more flexible environment, particularly if they are emerging from banks and setting up shop on their own. Independent investment analysts may have a competitive advantage outside of the confines of a bank, which are increasingly affected by increased regulation, compliance costs and potential or perceived conflict of interest, as with the recent case of the government of Indonesia cutting ties with JPMorgan due to their downgrade on Indonesian stocks.

Whatever choice the sell side and independent research providers make for providing investment insight, and however the buy side decides to gain access to those services, it will not all be decided this year. 2017 marks the start of the transformation of investment insight, a final move away from the PDF document and into a multi-year cycle of innovation.

Change can cause many short term pains, but with it comes some fantastic opportunities to capitalize on new ways of gaining access to dynamic insight more quickly, and in more areas, just when it is needed. There can be very few industries with people more capable of reacting positively to change and 2017 will be the year when we really start to reap the rewards.

2017 is the year when the research industry shakes it up: pushed by MiFID, but pulled by the desire to create a better, more efficient and effective investment insight industry.

Jon Foster, Co-Founder, Chairman, Smartkarma via Bobsguide 

Nov 11
0

Independents on the Rise: Spotlight on Asia

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Progress toward unbundling of payments for execution and other broker services is gaining traction in Asia.

In a recent article published on FT.com, UBS called the unbundling of commissions the “next big thing” in Asian equities, citing the 150 participants that recently attended its conference in Hong Kong as evidence of keen interest in what is already a key issue for UK-based firms.

In this piece, we examine the current investment research landscape in Asia and ask whether global trends towards research unbundling will positively affect the space.

The Current Investment Research Landscape in Asia

There are currently only a handful of unbundled research providers in Asia.

Some analysts have argued that the diverse nature of the region’s markets is to blame. Institutional investors are reportedly more reliant on their sell-side counterparts than in Western markets because of the difficulties in accessing sufficient liquidity and sourcing valuable research across the region. These difficulties have led portfolio managers and traders to form a closer link between research and trading.

“In Asia, you can’t only focus on the trading desk if you want your business to be successful and scalable,” says Jesse Lentchner, CEO Asia-Pacific of institutional broker BTIG in a recent article for The Trade. To reach the same level of penetration we have in the US, we have to cover fund managers and research analysts as well as the trading desks. But I do expect unbundling to continue apace in Asia.”

As the region continues to develop and the number of premium unbundled research providers increases, however, the space is expected to change. Sell-side firms who provide unbundled insight into Asian markets have already begun to gain market share in the region, and their growth in popularity is only expected to grow as the rest of the world moves towards unbundling.

The Global Appetite For Research Unbundling

The appetite for research unbundling is stronger in some markets than others.

In Europe, regulators are in the process of rolling out an ambitious series of financial reform that will force sell-side firms to separate research spend from execution costs. The revised

Markets in Financial Instruments Directive (MiFID II) is planned to take effect in January 2018.

It has been widely reported that MiFID II will disrupt the European investment research space, costing global investment banks billions to implement the changes required to comply with the new rules.

Those best placed to benefit from the disruption are not the global banks who dominate the space, but independent research providers. Since independents will not have to radically alter their internal processes and operational procedures to comply with the new rules, they can focus on attracting buyers from day one.

The European regulation will provide an impetus for institutional investors to choose research providers that provide a strong return on investment, since their research spend will be more explicit once MiFID II takes effect.

“Though the precedence of unbundling is emerging from Europe, the general view held across the industry is that this will have a global operational impact on asset managers operating across regions.  And beyond this, clients are already demanding transparency in price and value for research, with or without MIFID II.  It’s not a matter of if, but when.  We have seen a significant increase in interest in this topic in Asia over the course of the last 6 months,” says Jon Foster, Co-Founder of Smartkarma.

For more on MiFID II and our coverage of the rise of independent research providers in Europe, read our blog post here.

 

Oct 27
0

MiFID II: The True Cost of Research Unbundling

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The implementation of the revised Markets in Financial Instruments Directive (MiFID II) in January 2018 means that firms operating within the European Union will be forced to spend much of next year preparing a strategy for the new regulatory landscape.

MiFID II compliance issues have been widely discussed by the financial press in recent months, but reliable estimates on the expected cost of MiFID II compliance have not been available until now.

The True Cost of MiFID II

MiFID II is expected to cost firms $2.1bn in 2017, according to new research published by IHS Markit and Expand, a consultancy owned by the Boston Consulting Group. The estimate covered the top 40 investment banks and top 400 asset managers.

In the United Kingdom, where the Financial Conduct Authority (FCA) has taken a tough stance on MiFID II and its implementation, UK-based firms are likely to shoulder a large portion of the financial burden.

“There are a number of ways of interpreting the rules and they [FCA] have, for example in research, taken the more onerous one,” said Tim Cant, a lawyer to Ashurst LLP in London, in a recent article for Bloomberg. “In ordinary man’s street-speak, that is gold-plating.”

Investment Banks

Of all the firms surveyed, investment banks were found to be the least prepared for the likely event of a transformation within the financial services industry, according to the IHS Markit study.

The study found that most investment banks are planning to implement the vast majority of their MiFID II preparations in 2017. The decision to delay making preparations until months before MIFID II comes into effect could incur heavy costs for Europe’s leading investment banks. It is expected that other smaller firms in the space will gain market share as a result.

According to recent research published by EY, investment banks will be the hardest hit by the implementation of MiFID II.

Investment banks received a “high impact” score from EY in several key business and operational functions, including order handling, pre-trade transparency, post-trade disclosure, and derivative trading obligation, among others.

Critically, for the “Provision of investment services and protection of client interests” category, investment banks received “high impact” scores of 50% for all functions within that category. Namely, client assets/money, suitability, and appropriateness.

EY are not alone in their assessment. Recent PWC reports have also stated that MiFID II compliance costs will likely be highest amongst investment banks.

“MiFID II is going to require banks to rethink their strategy first of all; so they are going to have to redefine what sort of products they offer in the market, what sort of trading platforms they will operate in the future… And they will have to rethink the way that business lines interact with clients,” stated PwC in a recent report written on the subject.

The Competitive Advantage of Independents

Those least likely to be affected negatively by the implementation of MiFID II are independent research providers.

Independents dedicated to increasing transparency and efficiency in the investment research space have already begun to fragment the Asian and European marketplaces.  

“We believe the quality of research produced will increase, not decrease as the research landscape shifts towards independent research providers.  Increased competition in the research space will result in buyers taking a hard look at the true value add of their research spend.  Ultimately, we think that this will result in the best outcome for investors,” says Jon Foster, Chairman of Smartkarma.

For more on MIFIDII and our coverage of the rise of independent research providers in Europe, read our blog post here.

Oct 22
0

The Changing Investment Research Landscape – It’s Not Just MiFID

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While unbundling of research and execution has gotten a lot of attention in the wake of MiFID II, the regulation isn’t the only driver shaking up the investment research sector. But research will be consumed in a completely different manner, and competition among providers will increase as asset managers become more selective about what they buy.

There is a lot of talk around the unbundling of research and execution in the wake of MiFID II, but it is far from being a new topic on the regulatory agenda. Nor is it the sole driver shaking up the fairly static and predictable investment research sector.

In MiFID terms, the UK Myners report in 2001 started the ball rolling and there have been many false starts since. The European regulation, which is set for January 2018, is a firmly ensconced topic, forcing brokers and asset managers to review their payments structures and strategies.

There are other reasons behind the restructuring of the provision of research. Banks, which are under regulatory pressure, are closing their research departments, as they search for more profitable cost centers, while analysts are looking for different and flexible opportunities. Moreover, asset managers are becoming more demanding as the prolonged interest rate environment is pushing them to look for innovative ideas to generate alpha.

The MiFID II Dilemma

Shifting from a predominantly commission sharing agreement (CSA) managed research and execution program to full unbundling and integration of the proposed Research Payment Account (RPA) will not be an easy task. In fact, a recent study by TABB Group – “Unbundling: Opening Pandora’s Box” – showed that only 10% of European buy-side participants see themselves as fully unbundled compared to around 23% in the UK.
One of the main reasons is that few participants expected that the CSAs, which are the preferred payment option, would no longer be the main currency for payment. These agreements allow the buy-side to accrue their commissions with brokers, and separate the execution from the research component.

Under the new rules, CSAs will still have a purpose, but they will need to be supported with an RPA, which separates accounts funded by client money allocated specifically for the purpose of research payments. The RPAs would require asset managers to set a monetary budget for research that would not be tied to transaction volume. Fund managers and hedge funds that can use client money to pay for research would go down this route, while firms that cannot use client money must pay for research directly or fund the RPA themselves. However, there is industry confusion over whether CSAs can co-exist with RPAs.

For example, in its consultation paper, the French regulator advocated the CSA model, provided there are additional checks and controls in place for monitoring and measuring. By contrast, the UK Financial Conduct Authority prefers managers to have a single RPA which prevents multiple brokers from holding amounts on their balance sheet. It stated that operationally, this will require changes to current CSA accounts.

The challenge becomes even more complicated because MiFID II not only pertains to equities but across the spectrum. This means that brokers will have to provide accurate research pricing by specific asset class.

Not surprisingly, as the TABB Group report notes, these impending changes have made the sell-side rethink its research value proposition, as the buy-side will have greater accountability for which firm it chooses for such services. “If the buy-side decreases its external research spend, internal resourcing may increase but ultimately leads to a decline in sell-side investment in research provision, which in turn leads to a further fall in revenue opportunity for the banks,” according to the study.

And, although the MiFID rules are confined to Europe, global firms may not have a choice but to implement them, according to analysis by Bloomberg. It showed that the operational burden of running two different research structures might be too costly, forcing them to look toward a MiFID II-style research approach, which in turn could encourage regulators outside of the region to adopt similar regulations.

Changes Already Afoot

These changes have been coming for a long time. Many brokers have already taken action, with some, such as Nomura, closing their research departments, while others have downsized or, in investment banking terminology, “juniorized” their research and distribution teams. There has also been a tendency to tier clients in platinum, gold and silver buckets, depending on their overall spend, which has left some disadvantaged.

Another main concern among the buy-side community has been that the depth and breadth of coverage has been compromised, with the output focused on the more profitable large cap sector to the detriment of their smaller and medium-sized brethren. The same fears apply to less fashionable stocks or sectors, which will suffer if they come back into vogue at a different point in the cycle. There may not be anyone left to cover them.

The larger fund management groups have also already been building their internal resources to rectify some of these issues. In some cases, this has led to a drain of talent from their sell-side counterparts.

Looking Ahead

Against this background, it is difficult to predict just how much the new research landscape will change in the next few years, but there is no doubt that there will continue to be different configurations on the market. Competition will increase as asset managers become more selective about what they buy.

The same trends can be seen in music, where streaming has fundamentally altered the industry’s business model. In the same vein, research will be consumed in a completely different manner. There will be a greater number of independent firms that provide tailored or niche reports, as well as research platforms that amalgamate offerings from different analysts or providers with a varying range of payment options. This could cover purchasing a subscription or buying reports with cash as well as using CSA or the new RPA, depending on the fund manager’s own requirements. Whatever the end result, these are positive steps toward an investment research industry that is less fragmented and better able to serve the market.

As featured in Tabb Forum

Oct 13
0

Does the Future of Investment Research Lay in the Cloud?

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The landscape for technological transformation is experiencing another major paradigm shift, and the “cloud” is the latest buzzword.

Put simply, cloud computing is computing done online. In the past, users would run applications from software downloaded on a physical computer or server in their building, whereas cloud computing allows them to access apps through the internet.

Many global customer-facing brands have successfully migrated their product range to the cloud in recent years. Noteworthy examples include Microsoft and Adobe, whose flagship cloud-based suites Office 365 and Creative Cloud have been widely successful.

There are several tangible business benefits to implementing cloud offerings, including flexibility, increased collaboration, and enhanced analytics. Despite this, uptake in the investment research space has been slow amongst its major players. CFOs of global investment banks who dominate the investment research space are generally wary of cloud migration because it demands a considerable shift away from traditional computing methods, roles and business processes, which can be time-consuming and expensive to execute.

In this piece, we consider the benefits of cloud-based research for investors and ask whether the future of investment research lays in the cloud.

The Potential Advantages of The Cloud for Investment Research

Increased Collaboration – When analysts can access, edit and share documents anytime, from anywhere, they’re able to do more together. Cloud-based workflow and file sharing help analysts share insight in real time and gives them full visibility of their collaborations.

Work From Anywhere – With cloud computing, if you’ve got an internet connection, you can be at work. And with most premium cloud services offering mobile apps, analysts are not restricted by which device they’ve got to hand.

Remote working allows analysts to access intelligence from the world’s premier analysts, academics, data scientists and strategists, regardless of where they live.

Streamlined Document Control – When a firm makes the move to cloud computing, all files are stored centrally. Greater visibility means improved collaboration, which ultimately means higher quality insight and a healthier bottom line.

Investment research providers that are still relying on the old way are missing opportunities for analysts to collaborate easily across different time zones and regions, making it harder to create groundbreaking research.

In a recently published report by EY, the global consultancy found that “CFOs who truly understand cloud technology, as well as the associated challenges and risks, are better placed to manage the impact of cloud computing on the finance function and potentially gain a competitive advantage over less informed competitors.”

The Cloud: The Most Viable Long-Term Strategy?

An important consideration for CFOs ought to be the viability of their product range over the long-term.

Cloud-based investment research platforms that provide valuable insight in real time will appeal to millennial buyers, the first true generation of “digital natives.” Born between 1980 and 2000, millennials are about to move into their prime spending years both personally and professionally. Millennials are one of the largest generations in history, even larger than the Baby Boomer generation in the United States.

In a recently published article, Goldman Sachs wrote that: “millennials are poised to reshape the economy; their unique experiences will change the ways we buy and sell, forcing companies to examine how they do business for decades to come.”

The considerable effect that millennials’ affinity for technology has had on the retail space has been well documented, but it is becoming apparent that it will reshape the B2B space as well.

In a report written by Think with Google, the company found that millennials are increasingly holding B2B businesses to the same standards as consumer brands. They expect B2B brands to offer a seamless user experience across all channels and this is influencing their purchasing decisions. This trend is backed up by the findings of the report, which found that when researching vendors, the first priority for millennials is the ease of doing business. The second priority is the vendor’s ease of access to relevant data and statistics.

Investment research providers that continue to use the outdated model of publishing and distributing investment insight as disparate PDFs via email are likely to struggle satisfying millennial buyers with growing purchasing power in the coming years. With product information and price comparisons available at their fingertips, millennials are turning to firms that offer maximum convenience and value, at the lowest cost.

The Global Impact of Research Unbundling

This trend is likely to be compounded by the growing number of countries that have decided to “unbundle” investment research. In Europe, the revised Markets in Financial Instruments Directive (MIFIDII), which is planned to take effect in January 2018 will require asset managers to separate research payments from execution costs. If the firm wishes for a client to pay for research, fund managers will be expected to report on the individual research providers paid from the account, the amount they receive over a given time period, and the services they provide.

With their purchasing decisions placed under greater scrutiny, asset managers will be incentivized to “shop” around for a better deal. The firms that are likely to reap the benefits of this new regulatory landscape are those who deliver meaningful investment insight in real time at an affordable rate.

Investment banks who continue to charge a premium for research to sustain bureaucratic operational processes and overstaffed research teams will need to rethink their existing processes to remain competitive.

Oct 06
0

Investors: Are CSAs dead?

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The UK’s Financial Conduct Authority (FCA) published its third consultation paper last week on the implementation of the revised Markets in Financial Instruments Directive (MIFIDII), a rulebook that will rewrite Europe’s trading rules top to bottom.

The third consultation paper focuses on a number of business of conduct issues, designed to make the financial markets more efficient, transparent, and responsible.

Investors operating in the United Kingdom should take note that the paper contains important clarifications on the continued use of Commission Sharing Agreements (CSAs), a widely discussed topic in the financial press in recent months.

Key proposals of the consultation paper include:

  •      Strengthening inducement and research rules to drive better competition in the investment research space;
  •      Ensuring research is only produced and consumed where it adds value to investment decisions;
  •      Implementing requirements of full disclosure and transparent pricing models.

What is the FCA’s position on CSAs?

Specifically, the FCA said that any research payments received by brokers alongside transaction fees must be immediately deducted, or “swept” into RPAs (Research Payment Accounts). The FCA further added that this should take place “daily or within the settlement period for the transaction, although detailed reconciliations may take place less frequently, eg weekly or monthly.”

Currently, any funds that a broker receives under an existing CSA must be paid out at the end of each month, once the funds have been reconciled with its client. In a word, this is the FCA’s way of saying the existing model is no longer good enough.

Andrew Bailey, chief executive at the FCA, said in a press release last week published by the FCA:

“Strengthening consumer protection is one of the key aims of MIFIDII and this aligns with, and advances, our own statutory objectives. The changes to rules we are proposing today reflect key themes that we have worked on in both retail and wholesale markets over recent years to promote competition and market integrity.”

Bailey goes on to add:

“As we said in our statement following the EU referendum results, firms must continue to bide by their obligations under UK law including those derived from EU law. They must continue with implementation plans for legislation that is still to come into effect, of which MIFIDII is one such example.”

How has the FCA’s position been received?

Some firms did not expect the FCA to crack down so suddenly or thoroughly on the continued use of CSAs.

David Pearson, head of post-trade strategy at technology firm Fidessa, recently said in a Financial News article: “We always thought the CSA model will have to evolve but the FCA has said that it will have to evolve much more drastically than people had previously hoped.”

The FCA’s position on CSAs, and on research unbundling more generally, has bolstered the United Kingdom’s already strong commitment to capital markets reform. Once MIFIDII goes into effect, there is a strong chance that it will fragment the research investment space within the United Kingdom, which could, in turn, affect the wider European research landscape.

The UK has long been regarded as a pioneer of regulatory reform in Europe, with roots stretching back to the 2001 Myners report. More recently, the UK cracked down on corporate access payments in 2013, a move criticized by many of its neighbours on the continent.

In France, the reaction to MIFIDII has been unfavourable. Its regulators, the Autorité des marchés financiers (AMF) are strong advocates of Commission Sharing Agreements and open critics of Pan-European research unbundling initiatives.

In a recent consultation paper, the AMF said it preferred a “literal transposition” of the MIFIDII rules, given that they were “the result of a compromise reached following highly involved discussions and negotiations.”

On the topic of CSAs, the AMF said specifically that the MIFIDII “rules appear not to be incompatible with commission-sharing agreements.” The French regulators went on to say that the operational processes for monitoring expenses will need to be updated to meet the new requirements on research payment accounts, but it is unclear how this will be achieved at this time.

Will all EU-member states be forced to comply with the new rules on CSAs?

As the MIFIDII rules falls under a directive (opposed to a regulation) not all countries within Europe will be forced to take the same position as the UK on the continued use of CSAs, as exemplified by the situation in France. There is room for national leeway on the implementation of MIFIDII and its technicalities.

“Regardless of national regulatory interpretations, Smartkarma believes that competitive forces will see funds “comply” with whoever is most stringent. In other words, whatever is held out to be the “Gold Standard”. Competition for Assets under Management knows no national boundaries, given the part played by multi-national asset managers. Ultimately asset owners will demand “gold standard” investor protections whenever, and wherever, they choose to allocate their capital,” remarks Jon Foster, Co-Founder of Smartkarma.

The team at Smartkarma feel confident that research unbundling will rejuvenate the European investment research space, resulting in better quality research at fairer prices for buyers.

For more on the ways that MIFIDII will change the way that research is bought and consumed within Europe, read our blog post here.

Sep 29
0

Collaboration: What We’ve Learnt Has Implications Beyond Smartkarma

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At Smartkarma, we pride ourselves on our community’s unmatched level of collaboration and our ecosystem of seasoned analysts, cooperating from across the globe to debate and provide unconflicted research insight into Asian markets.

We talk about what a unique resource this level of collaboration is to our readers. Smartkarma isn’t like other research providers in the space focused on selling disparate reports; these firms leave buyers helpless, and forced to navigate virtual malls stocked with endless shelves of homogeneous product. Smartkarma is different because it’s a think tank at its core; a dynamic environment for sharing insight, creating context and themes, and discovering great insights together.

Or, so we say…

It all sounds great on paper, an idealised vision that looks good in marketing material.

But is there more to it than that? Does collaboration from the world’s leading experts truly produce ‘market-leading’ insight? Or, is it just another clever marketing trick designed to cast ourselves in a different light than our competitors?

In this piece we speak openly about what collaboration looks like in practice, what it has taught us, and consider its implications beyond Smartkarma.

Let’s start by looking at a recent case study.

The Report

Pelham Smithers Associates “PSA”, a UK-based independent research firm with an expertise in Japan, recently published a report on Smartkarma titled “The Best Chart I Have Ever Seen….. Well This One Ranks High”.
The chart in question was a seemingly innocuous dataset from fellow Smartkarma Insight Provider, Amareos. PSA wasn’t exaggerating its significance though. The chart neatly displayed a possible breakthrough, a potential new leading indicator in the Japanese equity market.

The Findings

The focus of Amareos’ original article titled “Caveat Venditor” was on the outlook for global fixed income markets.

PSA saw the chart, which quantifies the “tone” of public perceptions around Japan’s economy in real-time, in the Amareos article posted on Smartkarma. It was a product of crowdsourced sentiment analysis derived from millions of mainstream and social media posts, created by the brilliant team at Amareos.

PSA’s recognised the pattern in the chart was highly correlated to a chart of the YoY relative performance of Japan’s biggest equity index, the Topix.

So, PSA decided to dig a little deeper.

They found that the two bore striking similarities. But more than that, their research indicated a steady and consistent change was occurring; a change that has been occurring slowly over the last 15 years, as social media rose from its infancy years into the powerful data mine that it is today.

The change they identified was a doozy.

PSA found that historically sentiment lagged behind the market. The “experts”, the great and the good, would begin to sell, and over time, this negative sentiment would permeate through to conversations taking place on “main street”. However, as social media’s uptake grew and the voice of the crowd got louder, the gap narrowed. And Narrowed. And now it has just crossed over.

As Ryan Shea, Head of Research at Amareos notes,

“Financial professionals have long understood that emotions affect financial markets in a predictable way but incorporating such inputs quantifiably into a research or investment process used to be impossible. Now, thanks to technological innovation the “crowd” can be objectively measured”.

Shea goes on to add:

“The organic collaboration between ourselves and PSA is very exciting. It shows that crowd sourced sentiments can be applied in numerous ways to help investors boost returns via alpha-generation or risk mitigation. What’s more the Smartkarma community of financial professionals provides the perfect vehicle to exploit this new data source”.

The collaboration that produced this insight is cause for excitement here at Smartkarma. This potential breakthrough would never have been discovered and shared without a community like ours. And critically, without a way to collaborate and share knowledge and expertise, PSA may never had been able to connect the dots drawn by Amareos. Their respective works would be no more than two disparate PDFs sitting on a virtual supermarket shelf.

This raises an interesting question. If a model exists that changes a competitive and protective industry like Financial Research into one where ideas (and the economics that stem from them) can be shared to help produce entirely new breakthroughs, can the same occur in other competitive, economically driven industries? For instance, Pharmaceutical Research, Material Science, or Renewable Energy?

A secure, technology-based platform that creates a collaborative environment for experts to publish and distribute their work, debate findings and opinion, and which fairly operates by sharing the economics of that research, must surely be a step in the right direction.

Written on 28 September 2016 by

JON FOSTER, Co-Founder of Smartkarma

 

Sep 22
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Equity Research in 2017: A Buyer’s Guide

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The European investment research market is expected to experience disruption and fragmentation in 2017 ahead of MIFIDII’s implementation in January 2018.

Equity research buyers will need to rethink their existing research management processes to ensure they are ready to comply with the new rules.

In this piece we outline everything that buyers need to know about MIFIDII and suggest ways that investors can capitalise on changes to the investment research landscape to drive smarter investment decisions.

Key Points:

  • MIFIDII will require the unbundling of research payments from execution spending
  • Investment research must be paid from a fund manager’s own account or via a separate client research payment account “RPA”
  • Buyers must establish in writing their procurement rules, especially concerning the value research brings to their investment process

Impact of MIFIDII on the Equity Research Market

After years of intense consultation and lobbying, the European Securities and Markets Authority (Esma) has announced that its capital markets reform legislation will come into effect in January 2018.

Ahead of its implementation, MIFIDII is already causing disruption in the equity research space.

To comply with the new regulation, global investment banks, including Barclays, Citigroup, JPMorgan, Citigroup, Morgan Stanley, Nomura and UBS are devising new pricing models to remain competitive.

“In an unbundled world, where payments are separated, competition for equity and credit research may increase as asset managers look beyond traditional sources, which may trigger fragmentation,” say Bloomberg Intelligence Analysts Sarah Jane Mahmud and Alison Williams in a recent article by Bloomberg.

MIFIDII Likely to Cause Disruption in Investment Research Space

Nomura, Japan’s largest brokerage firm, closed its entire London-based equity research division in April of this year because it felt that MIFIDII will put the firm’s bottom line under sustained pressure.

In a statement made in April 2016, Tetsu Ozaki, chief operating officer at Numera, said: “This exercise will deliver significant efficiencies and cost savings for Nomura, refocusing the firm’s activities and reallocating resources towards its areas of expertise and most profitable business lines.”

Nomura is not alone in its concern that MIFIDII will bring increased scrutiny and potential losses to its equity research division.

“The first question any equity researcher we interview asks us is about MIFID and our approach,” said Laura Janssens (co-head of equity research at Berenberg) in a recent article by eFinancialCareers.

But while many global investment banks and brokerage firms are pessimistic about the outlook of the equity research market post-MIFIDII, there are several independent research providers who expect to gain market share as a result of Europe’s move to regulate research unbundling.

Independents Poised for Growth In New Regulatory Landscape

“Investment banking research is changing and there’s greater demand for more in-depth, longer-term focused information. It’s easier for us to innovate, and we’re nimbler without the same cost-bases of the big firms,” Andrew Howard (former CEO of independent firm Didas Research) recently told eFinancialCareers.

In a March report published by PwC entitled “Into the Future of Investment Banking,” the consultancy wrote that research providers who offer expertise on specialised areas will be the types of institutions to create ‘market-leading research.’

The equity research providers that are most likely to attract buyers will probably be the firms that provide in-depth, differentiated actionable insight at a reasonable rate.

Many independents operating within Europe are already getting the attention of equity research managers because they provide meaningful solutions to the problem of information overload.

“The industry has been distorted by a marketplace that is inefficient. My view is that we need to completely rethink how the business works,” says Smartkarma Co-Founder Jon Foster.

For more on how independents are poised for growth in the European investment research market, read our blog post here.

Smartkarma’s Buyer Advice

Our advice to buyers is to do a hard assessment of the research you are receiving- how much you really need and how much you’re paying for it.  

Institutions reviewing their research procurement processes should take a multi-faceted approach when evaluating research purchasing post MFIDII. With an increased focus around cost transparency, buyers should look for consumption analytics, which aid in assessing usage and value add.  

Buyers may also want to look into research marketplace models, which provide a direct link to research providers and can reduce costs associated with traditional research operating models.  

Finally, clients paying for research via an asset manager should look for a clear and quantitative approach to measuring research value with appropriate oversight and governance in place.