- Bank research is currently facing a raft of challenges. The expectations of our clients, which include the local cooperative banks as well as institutional investors, have become much more demanding in recent years. This is also due to the greater demands placed by the end or private investors on our clients themselves.
- Increasing regulation impacts on almost all stages of our work, which also leads to a notable increase in the effort involved in research. At the same time, very strong competition means that clients are often quite reluctant to pay for research. However, this is about to change soon as the new „MiFID II“ provisions will require research to be offered as a reasonably priced service from next year onwards.
- The falling number of analysts in the big banks in recent years and increasing regulation has led some observers to assume that the sellside research that is generally provided by banks could possibly come under such pressure that its existence could even be jeopardised. The Financial Times even dedicated an entire series of articles to this topic recently.
- However, the critics often make it too easy for themselves: it is obvious that no great expertise is needed in hindsight to differentiate between a good and profitable investment and a loss-making one. A forecast is unable to resolve the uncertainty about the future. Analysts are after all neither clairvoyants nor prophets – but their analyses and forecasts can help reduce this uncertainty and make planning easier for investors.
- The current results of our research speak volumes: with our selection of profitable investment ideas on the equity market as well as the management of a model portfolio that covers several asset classes, we have succeeded in achieving an excellent investment performance in recent years and have substantially outperformed the relevant benchmarks.
- Research ultimately contributes to the „democratisation“ of the capital market, as private investors in particular would not be in a position to make sound investment decisions without the support of skilled analysts. Good research will therefore continue to play an essential role in the future.
New demands on research
The banks around the world – and especially in Europe – underwent a period of change and restructuring in the last ten years. Business models have changed, driven on the one hand by new client demands and market-related requirements, and by a whole range of regulations on the other, that influence and permeate the business processes in a number of ways. These changes obviously impact on the banks‘ research departments as well, most of which are an independent but nonetheless integral part of the capital market business. Research in DZ BANK operates fully independently.
Bank research is currently confronted with numerous challenges – and the situation is not any different at DZ BANK. The expectations of our clients, which include the local cooperative banks as well as institutional investors, such as investment funds or insurance companies, have become much more demanding in recent years. This is because in turn, our clients themselves have to meet the demands placed on them by the end or private investors.
Regulation exercises a considerable influence
Increasing regulation impacts on almost all stages of our work. We are for example obliged to document our research process in detail, which takes up a considerable amount of time. Another example is the clean desk policy, whereby no opportunity is given to unauthorised employees to view documents left on desks that would give them an insight into current research work.
The general increase in regulation also leads to a notable increase in the effort involved in research. At the same time, very strong competition means that clients are quite often reluctant to pay for research. However, this will inevitably change, as the new „MiFID II“ provisions will require research to be offered as a reasonably priced service from next year onwards, if it should generally not be counted as a separate justifiable benefit. As a rule, it may no longer be provided as a gratuitous accessory within the scope of a transaction.
Changing market environment calls for fresh answers
Research is adjusting to the changing market requirements and also responding to the changing needs of the clients. Nowadays, the IPOs of new companies play a considerably smaller role on the equity markets than a few years ago and the new regulations are restricting the options available to many investors for investing in equities. The banks have reacted to these developments – they have restricted their equity research and most of them have significantly reduced their activities in this area of research in recent years.
At the same time, the low interest rate environment that is defined by the extremely expansionary monetary policy ensures that bond market investments have become largely uninteresting for private investors. Alternatives are needed; the preferred options here include real estate, commodities and alternative investments, and of course equities. Identifying opportunities on the equity market and weighing up the prevailing risks therefore remains an important task that research assumes for its clients.
Meanwhile, the price distortions on the bond markets make it even more important for institutional investors that cannot resort to other investments (for regulatory reasons) to be able to recognise and utilise the opportunities for return that currently exist in the fixed income market. Specialised bond research based on increasingly more sophisticated and complicated models is therefore required.
Research also comes at a cost
Overall, research will therefore become more diverse and tailored even more to the specific needs of clients. The new technical opportunities will also offer new channels for the distribution of research and provide clients with, for example, online access to a „tailor-made“ research product, to avoid having to undertake a long and laborious search process.
The requirements which have been increasing for years due to the tighter regulation of the banking business make it necessary to also adjust the research process. The provisions are generally associated with greater administrative expenses, not only in preparing the research but also for our clients, namely the private client relationship managers in the local cooperative banks. Within this process, we are trying to support our clients as much as possible to get to grips with the various new regulations. We offer new services such as archiving, which is vital in the advisory business for private clients. We have also organised our products along the new guidelines in such a way that we not only offer significantly more regulated „financial analyses“ but also the „other research publications“ that the advisors can continue to forward to end customers without any need for further controls.
MiFID II will introduce a new regulation from the start of next year, which will restructure the relationship between the research providers and their institutional clients. Research may generally no longer be offered free of charge to ensure greater transparency here. Just what the consequences for research will be in general is difficult to assess at present. MiFID II could in our opinion put smaller research houses under pressure. The customers will generally have to document and justify the purchase of research, especially to avoid or substantiate a new allocation problem. This could give rise to a trend on the demand side towards cooperating with only a few established players. It will therefore become increasingly important for the providers to have a clear edge over their competitors.
However, we find this shows a positive development overall. In addition to our broad, specialised product range, we at DZ BANK also have the advantage of having an established price model for our cooperative banks, which we can use as a basis for developing the business with our institutional clients. Even so, it is completely unclear at the moment, to what extent the industry as a whole will change its price structures
Why will research also be necessary in the future
The falling number of analysts in the big banks in recent years and increasing regulation has led some observers to assume that the sellside research that is generally provided by banks could possibly come under such pressure that its existence could even be jeopardised. The Financial Times, for example, dedicated an entire series of articles to this topic recently, in which partially established facts such as the aforementioned market and regulatory trends were combined with largely unsubstantiated allegations about an inadequate quality of research and the lack of accuracy of forecasts.
Analysts and forecasters are repeatedly confronted with this kind of criticism. Even so, the critics often make it too easy for themselves: it is obvious that no great expertise is needed in hindsight to differentiate between a good and profitable investment and a loss-making one. A forecast is unable to resolve the uncertainty about the future – it can be no more than a limited statement of probability. Analysts are after all neither clairvoyants nor prophets – but their analyses and forecasts can help reduce this uncertainty and make planning easier for investors.
DZ BANK Research’s successful investment recommendation
Aside from these fundamental considerations, the current results of our research speak volumes: with our selection of profitable investment ideas on the equity market as well as the management of a model portfolio that covers several asset classes, we have succeeded in achieving an excellent investment performance in recent years and have substantially outperformed the relevant benchmarks.
Our mixed „DZ BANK Portfolio“ for example has traded successfully on the market for more than five years. This is a model portfolio for investments in equities, bonds, commodities and cash, with which we use a total return approach. It has achieved a performance of 8.4% p.a. since its launch in June 2011. Our target return of 4% to 5% p.a. has therefore been exceeded every year since then. Our portfolio has also outperformed from a risk/return perspective. We use volatility as a measure of risk, in other words the extent by which the price development fluctuates. This was only 5.7% for the DZ BANK portfolio over the whole period and therefore only slightly above the volatility of euro government bonds (4.6%). The portfolio is characterised by a lower fluctuation intensity than a passive 50% DAX / 50% euro government bond portfolio, which features a volatility of 9.5%. The DAX alone has a relatively high volatility of 18.9%, which investors in a corresponding EFT fund would have to bear.
We have a constant supply of interesting „Equity Ideas“ for our equity investors“, a product that has also performed very well in recent years. Our DZ BANK Equity Ideas appreciated by 14.4% in 2016 (2012: 38.4%; 2013: 36.7%; 2014: 17.4; 2015: 3.1%). This represents an outperformance of 3.8% over the HDAX (2012: +12.9%; +2013: +11.5%; 2014: +13.4%; 2015: -9.9%), with 3.5% attributable to our buy and 0.3% to our sell recommendations. The DZ BANK Equity Ideas has appreciated by a cumulative 162% since it started on 02 January 2012, which represents an outperformance of 58% over the entire equity market.
The importance of research should not be underestimated
We are in no doubt that good research will not only continue to have a raison d’être for institutional as well as private clients, but that we will also continue to see sustained demand in the future, regardless of a changed environment. Ultimately, research makes an important contribution to the debates and formation of opinions on the capital markets. In order to illustrate the value of research, one only needs to imagine a world in which there are no more analysts and where it is left to all investors to make up their own minds about each investment opportunity. When faced with hundreds of pages of quarterly reports, it soon becomes clear that research is an essential tool for providing information and supporting investors in forming an opinion. The task of continuously monitoring and assessing the political and economic developments in the most important countries, which should serve as the basis for every investment decision, cannot be managed without a team of expert economists.
In this respect, research contributes to the „democratisation“ of the capital market, as private investors in particular would otherwise not be in a position to make sound investment decisions without the support of skilled analysts. Left to their own devices, investors would be hopelessly overwhelmed by the flow of information and would be at a serious disadvantage compared with the institutional investors on the market. Research analysts that operate independently within their banks (alone on the grounds of regulatory requirements) can undoubtedly also offer added value in the future.
The research providers naturally constitute a clear benefit: banks also ultimately carry out research to generate transactions. However, this is by no means everything. Research is one of the most important channels of communication between the banks and their clients and the public domain. Research for DZ BANK is also a support service for the cooperative banks with regard to their market presence in the business with private and corporate clients.
Research through the ages
There is no doubt that research will look different in ten years time than it is today. The technical progress we are seeing all around us in the course of digitalisation, as well as the preparation and distribution of research, will change significantly. Automation will progress further, especially big data processing, and the quantitative analysis models will become more complex and complicated accordingly.
At the same time, the individual needs of clients will play a key role in the distribution of the research. They will no longer receive an indiscriminate, large volume of publications and analyses from which they have to extract what is of particular interest to them. They will also develop a demand profile based on their requests, from which a „tailor-made“ research product can be derived. A more interactive relationship will develop between research providers and clients, so that the clients can exert a more direct influence on the research topics.
The research landscape is also facing major changes in the years ahead. Automation will no doubt make advances. However, highly-qualified and experienced people that work in the area of market analysis, while keeping the major trends and the overall picture in mind, will continue to be in demand. Good research will therefore still be indispensable for all capital market investors in the future.