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'Asia is a more complex and fragmented region for research,' |
A December agreement between Société Générale and Asia-based equity research platform Smartkarma could provide a blueprint for research distribution in the post-Mifid II world.
If successful, the concept could be rolled out globally.
“Mifid II is not the only catalyst for changes in research,” points out Stephane Loiseau, head of cash equities and global execution services, Asia Pacific at Société Générale. “There is also the cost of production, establishing price and engagement – how research is consumed and delivered. There have been questions over all of these issues for some time.”
Smartkarma, which was launched in 2014, is a collaborative publishing platform for independent researchers that charges one fee to buy-side users. It provides access to research from 400 analysts at 100 firms. Its predictive search engine matches research in real time with investor mandates. The client pays a flat fee and revenues are allocated back to contributors based on the level of engagement and usage by clients and peer analysts.
Asia includes developed, emerging and frontier markets; the availability of research and insight is limited in some of these - Stephane Loiseau, Société Générale
The concept addresses one of the key issues in investment research: how to price the product.
“There has been an awful lot of product produced on a push basis,” says Jon Foster, co-founder at Smartkarma. “This has been a standardized product replicated and pushed out with no feedback loop.”
The fixed income market faces particular challenges in establishing a price for research that is not paid for by commission, but pricing is also proving difficult in the equity market.
“On the equity side, there is more experience in pricing research, but that doesn’t mean that there is agreement over that price,” Loiseau tells Euromoney. “Through the platform, we are starting to provide an element of feedback to research, which enables a price to be put on it. If you go to 10 asset managers, you will get 10 different responses as to what that price should be.”
Smartkarma is believed to be the first research aggregation platform to manage an all-inclusive fee for research. Foster argues that by streamlining distribution of research, the tie-up will make the pricing process easier.
“The cost of production is a very important part of the debate that is often missed,” he says. “The first thing is: how efficient is it? What is the cost of production? As a fintech firm that was the first thing that we looked at. Banks don’t want to tell people how much it costs to produce research because they need to have that negotiation, which puts pressure on the asset manager. There is the burden of proof post-consumption: what was it worth? Arms-length pricing gets rid of that.”
Concept trialled
The concept is being trialled in Asia due to the particular nuances of the research market in that region.
“Asia is a more complex and fragmented region for research,” explains Loiseau. “It includes developed, emerging and frontier markets; the availability of research and insight is limited in some of these. There are also a very large number of stocks across the region. Large banks follow 600 to 800 stocks and investors are looking at between 1,600 and 2,000 stocks. There is also more complexity in how stocks move. It is sectoral as in Europe, but in Asia you have 15 or 16 countries with different operating models. You could argue that one person in Europe could cover a whole sector, but in Asia that will not work.”
If the platform can achieve scale and be implemented in other regions, particularly Europe, then it could go some way towards addressing some of the hurdles the industry faces.
Clear metrics on how useful individual pieces of research are to different firms go a long way towards establishing how much should be paid for them. Any SG client that uses the Smartkarma platform gets individual metrics on what they have been using.
“We have put in place a piece of tech that is easy to use for both sides of the market, so that the gap between the reader and the writer is simply a piece of software,” says Foster. “In other mechanisms, a lot sits between the reader and the writer.”
The concept of applying fintech streamlining to production and distribution is slightly more challenging for fixed income.
The main complication is that while the cost of provision is the same, it is built into the spread. But all of the costs of doing business are not embedded in that spread.
“We have fixed income research on our platform today,” says Foster. “But if you are dealing with, for example, Indian convertible bonds, the probability is that the only people that will really know about a particular issuer are the dealers involved in their deals. So an investor will turn to their equity research to find out about them.”
Foster maintains that initiatives such as this point to the future of investment research and may put paid to predictions that the market will shrink by 30% once the new regulations are in effect.
“We won’t face a situation where large parts of the market disappear,” he predicts. “There won’t be replication across the market. Fears of the wholesale cutting of research other than for large caps are unfounded. Mid-cap coverage will remain, but there will be less duplication.”
