The QCA/Peel Hunt Mid and Small-Cap Investor Survey brings together the views of 102 UK-based fund managers and 105 small and midsized quoted companies and was undertaken between October to December 2018.
MiFID II: It’s getting worse
Generally, feelings about the impact of MiFID II appear to have worsened since last year. The majority of the investor community have seen their list
of research providers decrease over the past 12 months, and only expect further reductions in the future.
Fund managers also expect this to lead to a decrease in the number of broking houses in both the short and the long-run. Indeed, access to research providers has decreased for many investors, as has contact with brokers, analysts and sales representatives. In the previous survey, around half of respondents noticed a drop in the volume of research on mid and small-caps being provided; this year nearly two-thirds said the same.
The first annual reviews of broker research quality and performance following MiFID II’s implementation will lead to many difficult discussions between the providers and recipients.
The message seems to be that brokers and investors need to be very clear about what value they are offering and receiving. It is very important that the corporate clients feel confident that their story is being imparted effectively by their broker
and heard by the key investors. The impact of MiFID II is causing everyone to consider how they play their role.
The expected fall in the number of broking houses suggests an expectation that some will fulfil their role better than others. Ultimately, corporate clients will vote with their feet and investors will vote with their research budgets.
- 62% of investors report that there is less research being produced on small and mid-caps since MiFID II came into effect.
- 86% of investors expect there to be fewer broking houses in the next 12 months as a result of MiFID II.
- Companies are taking action – 90% say they either have, or plan to, develop their corporate website to improve visibility to investors. Investors say that holding a capital markets day is the best way to improve visibility
AIM – into adulthood?
Perceptions of AIM appear to be relatively neutral at the moment, but a majority of fund managers are reluctant to label it an attractive market for companies looking to float.
Looking back at last year’s report, over half of investors said that the AIM market’s credibility had improved over the past 12 months; this year
about a third continue to say the same. Reputationally, we are seeing fewer instances of media criticism of the market itself when there is corporate failure, suggesting that the market has matured significantly over the last 10 years or so.
We are told that the quality of the research has declined in the past year. While many worry that the reduced quantity and quality of research may lead to mis-valuation of companies, there are those who see it as an opportunity to “beat the market”. However, a sizable majority see the effect of MiFID II on the liquidity of mid and small-cap stocks to be negative.
We are told by many investors (46%) that the change in AIM Rule 26 (to require companies to adopt a recognised corporate governance code) will have a positive effect on the companies, and by extension the credibility of the market. However, half of investor respondents seem to be taking a wait and see attitude.
The final judges in this will be the investors who can spot boilerplate wording and box-ticking a mile off. As with MiFID II the more active companies will gain more attention from their brokers and will be a more compelling investment proposition for investors.