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Revealed: the AM firms absorbing MiFID II research costs

Citywire Selector has compiled all the companies which have announced plans to absorb charges from next year.

MiFID II – why it matters

MiFID II comes into force on January 3 2018, but what will the regulation mean for investors and how much will it affect the role of selectors and asset managers?

The regulation has long sparked debate in the investment community as to who will be left to pick up the bill for research. MiFID II has been designed to increase transparency across the industry, however it has been met with criticism as many selectors have been left wondering who will actually have to pay for research.

Elsewhere asset managers have scrambled to work out how they will charge clients, or if they will absorb the costs. Back in May, Comgest’s CEO Arnuad Cosserat told Citywire Selector that the regulation is too vague and had become a grey area across the investment scene.

Meanwhile, Damien Armand, fund selector at Marseille-based Financière de l'Ar, said MiFID II is one of the centrepieces of financial market reform and will have far-reaching impact on everyone engaged in the dealing and processing of financial instruments.

‘The new rules are not only additional specific compliance requirements on the organisation of firms but they aim to address the shortcomings of the original MiFID release from 2007. The five pillars of the process include external controls/reporting, internal controls/governance, market structure, market transparency and investor protection.

‘In concrete terms, the AM industry is challenged to provide additional reporting requirements to regulators: trade and transaction reports, also reporting, expanded asset classes and data scope. While national competent authorities are requested to apply sanctions when in breach.

While many selectors have voiced differing concerns to Citywire Selector, a running problem has been how they will be impacted by payment for research. Read on to find out the firm’s which are set to absorb the costs.

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Kempen Capital Managment

One of the first firms to announce it would absorb costs was Kempen Capital Management. Back in June the firm decided it would cover the cost of external research itself.

Speaking to Citywire Selector, the firm’s CIO, Lars Dijkstra said regulation will make the industry more efficient meaning the end client will receive better value for money.

‘There is a lot of overcapacity with regard to sell-side research. When the buy-side starts to pay for this out of their own pockets, this overcapacity will be reduced and redeployed somewhere else.

‘Currently, the sell-side industry in general produces research with a horizon of around six to twelve months. This horizon matches less and less with the average horizon of its client base, which has bifurcated into very short seconds to weeks, hedge funds and high frequency traders, quant funds- and long to very long: three years plus, active engaged ownership.’

Looking at both sides, Dijkstra said the buy-side has been investing a lot in its own research capacity over the past decade as the sell-side horizon did not match their own horizon.

‘Most of our investment strategies have a three-year plus investment horizon. We hope that the sell-side industry will use this regulatory change to freshen up their offering and produce research with a longer term horizon then what they currently do. We will obviously direct our research spend towards these providers.’

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JPM Asset Management

In August JPM Asset Management announced it would shoulder the costs of external research payments in the wake of MiFID II coming into effect. The $1.9 trillion asset manager said it already commits ‘substantial resources’ to internal research, while it will use external analyst material where it feels it can add value.

Speaking to Citywire Selector, a spokesperson for JPM said: ‘JPM Asset Management (JPMAM) will be absorbing the cost of external research for all MiFID II regulated clients. Research costs will be paid by the business and not by MiFID II client accounts.

‘JPMAM already commits substantial resources to our internal research capabilities and we have not made any changes to our internal research teams as a result of this policy change. We also utilise external analyst research where we believe it can add value to client portfolios.’

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JOHCM

At the end of August, J O Hambro Capital Management announced it would absorb external research cost, directly paying for research used by its fund management teams, when MiFID II comes into play. The funding of the firm’s external research is expected to be approximately €5.47 million (£5 million) per annum.

In a statement, JOHCM Group’s CEO, Ken Lambden said: ‘As a high conviction active fund manager, our proprietary research is key to delivering investment outperformance for our clients, but we also value access to selected research generated by external parties.

‘The new MiFID II regulations increase the level of transparency around the cost of research services, and we feel that under these regulations the direct payment of this cost is in the best interests of our clients.’

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Vanguard

The world’s second-largest fund manager, Vanguard, also said it would cover the cost of external research from its own profit. The firm currently oversees $4.4 trillion of assets across the globe.

‘In a statement to Citywire Selector, a spokesperson from Vanguard said: 'Vanguard has extensive internal research capabilities across the investment markets to support both our active and index portfolios. In addition, we use external research where we believe it can add value to our clients.

‘Under MiFID II, research costs are expected to be less than $5 million. These research costs will paid by Vanguard directly.’

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Unigestion

Boutique asset manager Unigestion announced it would pay for MiFID II research in August. The firm had previously been vocal about the topic, with the firm’s head of equities, Alexei Jourvovski having told Citywire Selector that the new regulation would level the playing field for boutiques.

Unigestion’s decision will not result in any change in management fees and the firm said it remains fully committed to delivering value for money to all of its clients.

In a statement to Citywire Selector, Unigestion’s CEO, Fiona Frick said: ‘From enhanced costs and charges disclosure, to how products are marketed to different investors across the EU, MiFID II is a far reaching piece of regulation that will have a big impact on how both the buy and sell sides operate for their respective clients from 2018.

‘We believe that paying for external research ourselves is not only in keeping with the spirit of MiFID II and how it aims to provide greater transparency as a whole, but moreover we believe it is quite simply the right thing to do to ensure our clients have the greatest possible clarity on how and why they are being charged for our products.’

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M&G

At the beginning of the year, M&G Investments became one of the first major UK asset managers to split trading and research fees. M&G sent a letter to brokers stating it would only pay them for the cost of executing trades and would buy research on an 'a-la-carte' basis. Speaking to Citywire Selector, an M&G spokesperson said: ‘M&G has what we believe to be the largest team of in-house credit analysts in Europe and we do not charge clients for fixed income research.’

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T. Rowe Price

With around $927 billion in assets under management, T. Rowe Price announced it would pay for third-party investment research used by its UK-based investment manager, T. Rowe Price International.

The group’s co-head of global equity and CIO, Rob Sharps (pictured) said the decision has ensured client’s best interests are protected, while preserving its global collaborative investment process and its acess to important third party research.

‘T. Rowe Price has more than 500 investment professionals globally, including more than 250 investment analysts, and is well-known and well-respected for its internal global research platform.

‘In recent years, we have continued to invest in our alpha-generating capabilities around the globe by adding analysts focused on fundamental research, quantitative research, corporate governance, socially responsible investing, and corporate access. The supplemental third-party research we receive complements our own proprietary research.’

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AllianzGI

At the beginning of September, AllianzGI announced it would take on the research charges of MiFID II, rather than passing them on to clients. Allianz GI’s decision will apply to all funds registered in Europe and mandates managed in Europe, with strategies managed outside Europe unaffected.

Commenting on its decision, the group’s global CIO, Steve Berexa, said: ‘By forcing the creation of separate pricing for broker research, the new regulation has provided the investment industry the opportunity to completely reappraise how external research costs are addressed. As a trusted advisor, we are committed to protecting our clients’ best interests as we implement regulatory changes. This is the best solution for the customer as well as for an efficient investment process.

‘Within the framework of our global business model, which benefits from a globally integrated investment platform where research and investment ideas are shared, we have determined that the efficient and best-suited solution for all parties involved is to assume external research costs ourselves. It is also in the spirit of MiFID II, which aims to avoid conflicts of interest in securities trading.’

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Hermes Investment Management

From January 2018, Hermes will pay the cost of any external research payments itself and earlier this year the firm appointed a new research director to manage MiFID II issues.

In a statement Hermes said: ‘As part of the investment office, which provides independent oversight to the investment teams, Orla will oversee the procurement of equity and credit research from brokers and independent research providers for Hermes’ investment teams.

‘In this newly created role, she will also be responsible for establishing, reporting and linking research value, managing the research budget, transaction cost analysis and other MiFID II issues.’

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