An analysis of consequences of the European restrictions on broker commissions from fund managers, under MiFID II, has led to some interesting work on what constitutes an optimum size and structure of an investment team. The results are equally applicable to big super funds and other institutional investors.
A recent international shares sector report by wholesale research house Zenith Investment Partners also analyses the correlations between size of research team, structure of team – either with specialists or generalists – and the number of locations over which the team is spread.
A perhaps unintended, but natural, consequence of MiFID II was that sell-side analysts have shrunk in number and market coverage by them has declined by about 10 per cent. This has presented fund managers with more opportunities because of an increase in the inefficiency of the market. At the same time, managers and presumably big pension funds with internal teams, have been able to avail themselves of a new pool of researcher talent.
The Zenith study, overseen by Quan Nguyen, Zenith’s head of equities, was confined to global equities but looked at a five-year period to September 2019. Whether or not the results are applicable to domestic markets, including those as small as Australia and New Zealand, is open for conjecture and further study.
Nguyen says: “Our study suggests that large teams operating under a specialist structure, driven by a compact decision-making approach, tend to exhibit greater levels of outperformance when compared to the alternative characteristics. However, we found that there is no single template that managers should follow to succeed.
“We have observed successful managers that do not align with the ‘optimal’ characteristics in our analysis and unsuccessful ones that mirror the ideal template. Overall, we believe a team’s ideal structure needs to align with its investment philosophy and process.”
Unlike capacity issues with manager size, the bigger the research team, generally, the better according to the performance of global managers in the Zenith universe. However, the relationship is not linear. There are diminishing marginal returns for additional analysts.
And, perhaps, one of the reasons for the outperformance may be the ease with which larger teams can adopt a specialist approach in their structures compared with smaller teams. Those with specialists also tend to outperform.
And while some managers like to have all their analysts under the one roof, to aid communications, there appears to be no correlation – inverse or otherwise – between the number of offices and performance. Zenith puts this down to technological advances in communications.