The number of financial analysts tracking small companies fell during in the first half of 2018 as changes in European Union rules forced a shakeup in how banks charge for research - potentially clouding investor visibility in some areas. Under the Markets in Financial Instruments Directive II (MiFID II), which went into effect on Jan. 3, fund managers are required to pay an explicit fee for research from banks they previously got for free.
The rule change made it more likely that fund managers would cut back on the amount of research they get. That in turn could force brokers to curb their coverage, particularly of smaller companies.
During the six months since MiFID II was introduced, Britain has seen one of the biggest drops in research coverage, Reuters data show. The median number of analysts covering a stock on MSCI's UK smaller companies index fell from nine to eight.
Italy was the only other country to see its median figure fall. Most others were unchanged over the period.
The figures were similar for the FTSE All Share index, which includes larger companies on the blue-chip FTSE 100 index. The median number of analysts per stock fell from 10 to nine and the mean fell from 10.8 to 10.1.
The decline is in line with a broader trend of diminishing coverage. The average number of analysts covering the stocks on the FTSE All Share was down by around 30 percent since the beginning of 2014.
Switzerland was the only major country where analyst coverage of its small-cap index improved, although it remains poorly covered compared with its peers.
Britain had the most coverage in January, with local brokers competing against global banks, a study by Reuters in January found.
But London-based Cenkos, for example, now covers around 150 companies, according to a source familiar with the company, down from 170 in December and 195 at the end of 2016, according to its annual report. In March, it reported revenues from its research division fell 41 percent to 2.9 million pounds in 2017.
Cenkos did not respond to requests for comment.
While coverage of companies fell, experts said there was little evidence of large amounts of analyst redundancies.
"From a headcount perspective, we don't see any reduction - in fact, marginally, we see an increase," said David Enticknap, the head of Extel, a firm that surveys and ranks more than 10,000 analysts covering European equities.
"Most sell-side firms are waiting to see what the impact of MiFID will actually be rather than take a punt on it."
Macquarie announced in May it would make some of its analysts redundant and focus its European equity research coverage on six key sectors.
But other firms have added staff. German broker Berenberg has hired a dozen mid- and small-cap analysts since the beginning of the year, sensing an opportunity if rivals step back. "There seems to have been a bit of analyst movement in the first part of the year, and we have sensed some discontent (at other brokers)," said Laura Janssens, Berenberg's head of research.
"I am absolutely convinced that a major unintended consequence of MiFID will be less coverage for small and mid-cap companies."
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