Regulation has accelerated hard times for equity analysts - but general insurance needs good quality professionals to help prevent harm to investors
Briefing by Saxon East
There was a time when the Insurance Times inbox was full of rich research from some of the brightest brains in equity research, which was duly packaged and fed to our audience. Not anymore.
A piece of European regulation, the revised Markets in Financial Instruments Directive (MiFID) introduced last year, has had a crushing impact on equity analysts, making times much tougher for them.
So why is this and why does it matter?
Fund managers now have to unbundle trading fees and research costs.
This means research has to be sold as a standalone product. The big funds and asset managers are now having to pay out of their own pocket for research, something they are reluctant to do and only a selective basis.
This has led to broking houses effectively flushing out experienced equity analysts for cheaper, younger and less experienced analysts in a process known as ‘juniorisation’. Other seasoned researchers have simply quit.
Yes, some of the more experienced and highly-skilled equity analysts do get their research paid for, but even then it’s not the lucrative bonus-based business it once was.
This means there is less quality research reaching the desks of asset managers and funds. This might harm trading in insurance firms and brokers, especially the ones trading below FTSE 100.
Arguably, the biggest concern is that there will be virtually no research for small and mid-cap companies, apart from the nominated house broker. Without that scrutiny, there are two risks. Firstly, liquidity will dry up for these companies.
Secondly, we could end up with more companies like Quindell, namely firms which list and grow quickly on the back of releasing poorly-scrutinised and highly-questionable information. This is no small matter. Remember Quindell was once the largest market cap firm on AIM at £2.5bn before the bubble burst spectacularly.
Research reports have also dried up to the media. That matters because the media play an important role in feeding information to retail investors.
Without this information, spurious firms may find it easier to suck in retail investors and harm ordinary people’s savings invested in questionable ventures.
In truth, equity analysts were already facing a tough time with automated trading and general industry margin pressure. But regulation has sped up the decline.
One thing is for sure: non-life insurance has had some outstanding equity analysts and it is a poorer industry without them.
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