Brokers Launch Funds to Prove Their Worth as MiFID Threat LoomsBy
New products put firms’ investment advice to work in market
ETFs, basket-traded, managed accounts demonstrate performance
Faced with falling prices for research, Rob McCreery decided his Libra Investment Services would start doing some of its own trading to show off the money-making power of its investment recommendations.
After Libra’s trade ideas -- posted on so-called alpha capture platforms -- outperformed the market, four investors set aside $30 million for LSA Equities to invest, including $5 million last week. The separately-owned vehicle is composed of lower-cost managed accounts that follow the quant strategy the research firm sells to clients.
“If we didn’t have this, I’d be panicking” because of MiFID, said McCreery, founder of the London-based provider of quant-based fundamental research. “We were top ranking and started wondering why we were giving our ideas to somebody else. Now LSA is competing with clients.”
Firms that offer investment advice are under unprecedented pressure to prove their worth as the revised Markets in Financial Instruments Directive forces them to charge for research and brokering services separately starting in January. While some are negotiating bargain-basement prices or stressing the depth of their coverage, others like Libra and Sanford C. Bernstein & Co. are starting their own investment vehicles to demonstrate the value of their advice, and make a little cash in the bargain.
LSA, which charges 1 percent of assets and 10 percent of gains, has produced total returns of 22.4 percent since its inception in October 2015 through November this year when denominated in euros, according to the company. Total return for the Stoxx 600 Index in the period was 14.9 percent, data compiled by Bloomberg showed.
AlphaValue SA, an independent French firm, has launched a basket-traded fund for one of its insurance clients with tens of millions of euros in assets that will be managed by AlphaValue’s investment committee. The company expects the fund to contribute to revenue and has more vehicles in the pipeline due to client demand.
“This is a business that transforms our savoir-faire into a product,“ said Maxime Mathon, head of marketing at AlphaValue. “The alpha we capture in a consistent manner won’t necessarily be adequately remunerated in a MiFID environment, so why not be paid in a recurring way?”
AlphaValue has negative ratings on about 45 percent of the companies it covers on the Stoxx 600, more than twice the level of the second-most negative peer among 19 firms, according to data compiled by the company.
The fund has returned 3.47 percent since it was set up in May, compared with a fall of 0.73 percent for the Stoxx 600. AlphaValue is using an investment bank for its basket-traded funds, which typically provide exposure to a group of securities. Investment banks have long created such funds for institutional investors to follow specific strategies or stock recommendations made by their sales desks.
Still, not everyone is convinced that proving the quality of research is enough. Peel Hunt LLP, the U.K. brokerage and research firm, says the size and quality of the companies they cover and their list of investor clients is a consideration.
“Being No. 1 in research and stock picking are two very good starting points, but they do not differentiate you,” said Steven Fine, Peel Hunt’s chief executive officer. “A decent crop of relevant corporate clients is an important function in making sure that you remain relevant to the buy-side.”
Sanford C. Bernstein, the New York brokerage firm, launched U.S. and global ETFs that track stocks rated “outperform” by the firm’s research analysts. It wants to demonstrate that its in-depth fundamental research and quantitative model add value to active management at a time when passive strategies are enjoying greater inflows. The U.S. ETF returned 6.02 percent since it started in October, beating a 4.55 percent gain for the S&P 500 Index. The global fund added 2.44 percent compared with a 2.52 percent rise for the FTSE All World Index over the same period.
“Somehow we have had the reputation for great fundamental research, but not great stock picks,” said Robert van Brugge, CEO of Bernstein. “If you measure the performance of our stock recommendations, it’s actually been very good for a long time.”