Research budgets are finally turning around in Europe, according to a recent survey from Substantive Research, but there’s still a long way to go before spending can return to pre-MiFID II levels.
While research budgets have been stabilising after six years of price depreciation, Mike Carrodus, CEO of Substantive Research, warned that research spending is still a long way from pre-MiFID II levels. This situation will not be immediately ameliorated if the FCA’s new rules allow for European research spending to approach US levels, he added, stating: “Even if research costs do end up chargeable to asset owners once again the new procurement rigour in research valuation and payments from the buy side is going nowhere. If this market is to reflate materially, there will need to be new demand for new asset classes, and new supply required to justify additional payments in future.”
In the US, research budgets rose by 15% as a proportion of AUM in 2024; in Europe, this figure was just 4%. US research budgets are able to bounce back more quickly than their European counterparts due to the larger budgets of investment professionals, the report explained.
These figures also demonstrate why UK and EU regulators have been under political pressure to allow asset managers to return research costs to end investors, Substantive Research said.
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Research budgets have increased by 2.2% YoY in absolute terms, the report found, a shift that Carrodus said “fundamentally changes the dynamics of the research market”.
“Within that figure, some providers are increasing pricing and driving greater consumption of meetings and calls with their sector analysts. We are back to a market of winners and losers, instead of almost all research providers experiencing price deflation year after year,” he continued.
Within these budgets, the majority of spend is allocated to brokers. Down by 1% since 2023, this group received 85% of funds in 2024. Tooling and analytics solutions grew by 1% YoY, an increase which Substantive Research expects will accelerate in the 2025 budgeting cycle. Independent research providers took an average 8% of the budget and expert networks 2%, both remaining unchanged since 2023.
Research budget concentration to the top 10 brokers rose from 54.8% to 54.9%, a marginal difference but something that Substantive Research says needs to be monitored. Change here could signify that the FCA’s reforms are encouraging competition as intended, it stated.
Looking ahead, Carrodus told Global Trading: “For the full year it’s going to be hard to call whether this trend persists. A group of firms who didn’t cut budgets immediately post-MiFID II will definitely be reducing their payments at the end of this year, but this is against a backdrop of a number of particularly US managers increasing their research spend. That doesn’t necessarily mean there will be more money for brokers however, as new spend is often targeted at alt data, expert networks and aligned transcription services, as well as analytics and tooling.”
A total of 60 asset management firms participated in Substantive Research’s survey, with a 60/40 split between those headquartered in Europe and North America and a 75/25 split between long-only and hedge fund managers. The firms represented a collective US$20 trillion or more in assets under management.
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