The study reinforces recent reports that the EU directive has squeezed research and analyst coverage, such as in the mid- and small-cap spaces.

Another survey underlines financial industry worries about how the European Union’s MiFID II regulations, enacted last year, are cutting research and potentially reducing liquidity and coverage of stocks, such as in the mid- and small-cap spaces.

A survey of almost 500 European portfolio managers by the CFA Institute found that more than half (57 per cent) of respondents said they have obtained less research from investment banks than they did before the directive took effect last January.

One of MiFID II’s features was a requirement for firms to unbundle research payments and make costs more transparent, with the aim of improving investors’ value for money. The net effect of this has been to make firms think twice about older ways of buying research, and the sell-side’s offerings have shrunk, according to reports. 

“MiFID II has brought transparency and competition to the investment research business. But as asset managers have absorbed research costs, we have seen a notable reduction in research budgets that is causing a shake-out among research providers”, Rhodri Preece, CFA, head of industry research, CFA Institute, said.

The CFA report said “research budgets have been scaled back, with the largest firms making the biggest budget reductions; the average decrease in research budget according to respondents is 6.3 per cent”. 

Cuts in budgets go up with firm size: for firms managing more than €250 billion of assets, the average budget reduction is 11 per cent, whereas for firms managing less than €1 billion of assets, the budget change is “negligible”, the report said.

The industry is not unanimous about what the impact on research standards has been. Buy-side professionals mostly believe that research quality is unchanged, but sell-side respondents are generally more pessimistic, with 44 per cent believing that research quality has decreased overall. A relative majority of sell-side respondents - 44 per cent - said that research quality of small- and mid-cap stocks has fallen. Fewer than 10 per cent of respondents across both buy-side and sell-side believe research quality has increased.

The 2018 CFA Institute MiFID II survey was conducted in December 2018.

A research report by the Qualified Companies Alliance and brokerage firm Peel Hunt, as reported here on 6 February, found that in its survey of 102 UK-based fund managers and 105 small- and mid-cap firms, 62 per cent of investors said that less research was produced on such firms since the European directive became law. Some 86 per cent of investors expect there to be fewer broking houses in the next 12 months.