EUROPE - European portfolio managers could be at risk of not receiving adequate company research from brokers, as their needs may be sidelined by demands from institutional traders.
Portfolio managers believe that 57% of a broker’s commission goes into equity research and 33% into trading coverage. Five percent goes into soft commission services, 2% into new issues, 2% into prime brokers and 1% into mutual fund sales considerations.
Inversely, traders are of the view that 39% of the commission is funnelled into research and 49% into trading, coverage and liquidity, according to research from Greenwich Associates.
Traders represent a greater proportion of business for brokers, considering the typical trader in European shares appears to be controlling e1.7m in commissions, while the typical portfolio manager controls e360,000.
If institutional traders are right about the percentage of commissions they are disbursing for research and the percentage they are disbursing for trading coverage, their importance is potentially four to five times greater than that of portfolio managers.
“This may cause some brokers, including some key brokers to direct more business toward trading and to cut back on research and sales services which they provide to institutions,” said John Colon, Greenwich Associates’ consultant.
Undoubtedly this would disappoint and frustrate many portfolio managers looking for sell side research.
There is the tendency in the US for institutions to conduct their own in-house research, whereas in Europe, largely due to the multi country and complex nature of the market, research is often the domain of the broker.
“Although the dichotomy between trader and portfolio manager views on spending objectives is understandable, it illustrates the possibility that commission allocation may need even more scrutiny than it is already getting,” commented Colon.
In separate research Greenwich has found portfolio trading now accounts for more than 40% of share trading volume at more than 100 of the largest North American institutional investors. The average institution’s portfolio trading volume increased nearly 10% from $7.6bn in 2002 to $8.3bn in 2003.
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