European investment banks and brokers are expanding their equity research operations, four years after steep cuts due to new European Union rules governing how they are remunerated.
The number of equity analysts at large companies rose 1% in 2021, following cumulative reductions of more than 12% in the previous three years, according to a survey by Substantive Research, a research consultancy.
There has also been a marked slowdown in the trend of “juniorization” which sees seasoned analysts replaced by less experienced and cheaper new hires, according to the consultancy.
Substantive Research managing director Mike Carrodus said while some companies were cutting further, this was offset by the hiring of a number of top brokers as asset managers increasingly reward companies that improve their coverage.
“Buy-side research evaluation processes have matured over the past three years and now ensure that payouts quickly reflect changes in the quality and breadth of coverage,” he said.
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The research industry was transformed by the introduction in January 2018 of EU MiFID II trading rules which required brokers to charge fund management clients for research separately from trading fees.
Most fund managers have decided to pay for research out of their own profits, rather than funds, and their expenses have dropped by up to 75% according to Neil Scarth of Frost Consulting. Faced with a drop in their fees, many brokers have tried to reduce their research costs.
But some of the big companies maintained stable budgets and some ambitious brokers, notably Jefferies, stepped up their investments throughout the period.
Carrodus said Jefferies’ decision to hire and retain experienced analysts has been rewarded with a significant increase in its fees. Jefferies rose to seventh place in Substantive’s ranking of asset manager fees in Europe last year, ahead of Bank of America. Goldman Sachs, which has reduced its search staff but rehired over the past year, fell to tenth place.
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In the United States, the Securities and Exchange Commission allowed the practice of bundling research costs into trading fees because it feared the impact Europe’s change would have on the research supply.
As a result, the US analyst workforce fell just 4% in the three years to 2020. However, according to figures from Substantive, it fell 1% last year, even as the workforce in Europe was beginning to recover.
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