European regulator Esma is advocating a revision of research rules, expected to take effect next year. Allowing research and trade execution to be paid for jointly again could create new opportunities for smallcap coverage.
That emerges from an Investment Officer survey conducted in response to the decline in analyst reports since the introduction of Mifid II. Investors said they experience little inconvenience from the reduction.
In October 2024, the European regulator proposed once more allowing a single account for research and transaction costs, provided that investors and brokers make clear arrangements in advance. It must also be specified which portion is intended for research, and investors must assess annually whether that research actually adds value.
The change was formally introduced through the eu listing act, but its practical implementation still depends on various factors, meaning full adoption is expected by 2026 at the latest. According to conversations Investment Officer held with investors, the adjustment could make research on small- and midcaps more attractive.
Limited impact
When Mifid II took effect in 2018, brokers were required to separate research and trading costs. As a result, analyst desks became more selective in the companies they covered. Small- and midcap coverage declined most, both in the number of analysts following these firms and in research frequency. Since then, investors in that segment have relied more heavily on their own analysis, increasing the upfront cost per idea. Still, the actual impact is not major, market participants said.
‘We haven’t been significantly affected by the regulation,’ said Yves Vaneerdewegh, until recently cio of the Brussels-listed investment fund Quest for Growth and now portfolio manager of the Quest Cleantech Fund. ‘There are still many local and larger players publishing research. The number of reports has declined, but there were never dozens of reports available for small stocks to begin with.’
Continuity under pressure for years
Cristina Matti, head of European small caps at Amundi, noted that the availability of research has gradually declined. In her view, the continuity of smallcap coverage has been under pressure for years. Interest is usually high around ipo events due to involvement from sell-side firms, but ongoing coverage varies widely. When a stock performs well, coverage typically remains stable. When performance disappoints, analysts often scale back their efforts or stop covering the company altogether.
Some very small smallcap firms commission their own research to maintain visibility, Matti said. That is also noted by Miguel Pohl, cio European mid- & smallcap equities at Allianz Global Investors. He pointed out that this complicates the classification of “independent research.”
Companies easier to approach
Pohl, who also does not struggle with a lack of reports or limited access to companies, adds that some brokers make their research available free of charge. ‘The value and quality may have declined somewhat,’ he said. According to Pohl, research is more frequently driven by liquidity-related events, such as capital increases and refinancings.
Portfolio manager Vaneerdewegh emphasized that analyst reports are not the primary source for investment decisions. He said the quality and frequency of corporate disclosures among smallcaps have improved, and it has become easier to maintain direct contact with these firms. ‘By engaging with companies directly, you get the most essential information,’ said the manager of the fund that holds roughly twenty to thirty positions. ‘Mifid II has not affected our strategy.’
More internal research
Amundi was able to compensate for the decline in external research largely through internal capacity. ‘We have always invested heavily in independent research. The direct impact of Mifid II was therefore limited.’ For smaller firms without extensive research capabilities, the situation may be more challenging, Matti said.
Pohl noted that the selection process at Allianz has become faster. ‘Previously, more brokers pitched ideas. Now we search for ideas more proactively.’ Investors meet companies mainly at conferences, where new names are screened for strategy, valuation, and growth potential.