04 October 2017

Blog: MiFID II and research - "If a tree falls..."

by Scott Fulton | 4 October 2017

You know that you are tapping into a zeitgeist when your views appear in two major newspapers in the space of three days.

Following the coverage we received for our report on MiFID II in CityAM on 2nd October, The Times today has also reported our views in a larger article covering Fidelity’s announcement of its new pricing structure.

Knowing that my kith and kin are maintaining scrap books of all public mentions of the author – and his employer it need not be said – I promptly sent the link to The Times article down a variety of social media channels.

The response was interesting.

On Monday, the CityAM coverage received mixed reviews but at least everyone who received our messages read the article.

Today, and almost without exception, I have received requests for a scan of the article “because I/we do not subscribe to The Times on-line”.

Like a Preacher on Radio 4’s Thought for the Day, I was struck by how a small “real life” experience can inform a wider debate.

In our view, the MiFID II regulations on investment research will place a significant proportion of comment and analysis behind a pay-wall; either directly with the fund manager or as a function of the “on-demand” market.

Given that the apparent costs of receiving this research may well be more than £10,000 per user per year from just one broker, it is safe to say that research provided in this manner will be for the few and not the many.

“Free” research (market commentary) will not contain the same level of detail or analysis under the terms of the regulations.

This brings me to consensus forecasts. The “consensus” is the average (mean) of the total number of current forecasts produced by analysts. Under MiFID II, the ability to “see” this mean may be fatally compromised.

Indeed, it is not beyond the realms of possibility that there will be more than one “consensus”; an illogicality which seems to have escaped the authors of MiFID II. One “average” for those whose forecasts are seen only by a select few fund managers who can afford the retainer. Another for those whose research is placed on-line and then acquired “on-demand”. A third for those who produce research for free, arguably on behalf of their corporate clients.

Thus, a company may report a set of results which could beat, match and miss a version of “market expectations” at one and the same time.

We do not believe that this is impossible. Indeed, we are aware that the UK Investor Relations community is taking this potential problem very seriously.

CAG offers the following suggested solution.

The London Stock Exchange (LSE) and the Alternative Investment Market (AIM) have been mute on MiFID II as far as we can see. However, as the regulations are constructed to drive equity trade back onto exchanges, we believe that it is time for them both to break cover.

Specifically, we believe that they should both consider providing a consensus forecast service which would benefit all stakeholders; issuers, brokers and investors.

The service would be relatively simple to create. There already exist several consensus forecast providers supporting listed companies who could work with the LSE and AIM.

Its structure would be equally simple. Offer companies – and their advisors – the scope to determine a discrete set of “KPIs”; e.g. EBITDA, PBT, EPS, DPS and FCF. These would form the basis for a feed from covering analysts whose forecasts for each metric would be held by the exchange.

This data would be collated and used to produce a mean, high and low (together with the number of analysts) for each metric. The individual forecasts would be anonymous but there would be a list of contributors.

The data would be published by the LSE and AIM and would be free to air.

Both exchanges could manage the relevance of the consensus by insisting that only forecasts which have been submitted within a certain timeframe (within three months from the last formal result for example) would be allowed into the analysis.

We believe that this would be a considerable benefit to all involved in the UK equity market. One central resource for all forecasts covering listed companies. A data point which would inform comment and allow companies to be more exact when commenting on their performance against “market expectations”.

This is not a new idea. There are several UK companies which already provide their stakeholders with this form of analysis. With apologies for those we have missed, we recommend looking at;

GKN plc - http://www.gkn.com/en/investors/analysts-coverage/

Taylor Wimpey - https://www.taylorwimpey.co.uk/corporate/investor-relations/equity-analysts/consensus-estimates

Under MiFID II, the UK equity market will need the LSE and AIM to take a bigger role in the provision of relevant information. The provision of a limited but accurate and timely consensus forecast analysis for its issuers would appear to be a good start.

“If a tree falls in a forest and no one is around to hear it, does it make a sound?" Critically, is it a forecast?