The City of London's Evolving Landscape: A Tale of Analysts and Small-Cap Woes
In the dimly lit attic, I uncover a treasure trove of forgotten memories, a collection of vintage notebooks filled with the names of brokers' analysts, their phone numbers, and personal traits. This was the toolkit of financial journalists in the 1990s, a time when the City of London buzzed with life and the Extel awards were the pinnacle of recognition. The Extel awards, once a grand affair with a guest speaker like the late Alistair Darling, have evolved into a more subdued affair, reflecting the changing dynamics of the financial industry.
The decline of small-cap analysts is a fascinating story. The introduction of MIFID II in 2018, aimed at enhancing investor protection and market transparency, dealt a significant blow to the sector. Brokers were forced to charge separately for research, a shift that particularly affected small and mid-cap companies. As a result, the number of small-cap retail analysts has plummeted from 29 in 2007 to just 17 today, while support services analysts have also seen a decline. This attrition is further evidenced by the disappearance of once-prominent names like Bridgewell Securities and Seymour Pierce, now replaced by consolidation giants like Deutsche Bank and Liberum.
The impact of MIFID II extends beyond individual analysts. Sector coverage has narrowed, with only nine sectors remaining in the UK SMID survey, down from 18 in 2007. This reduction in coverage highlights the challenges faced by small-cap companies in maintaining visibility and access to research. However, a glimmer of hope emerges with the recent softening of rules by the Financial Conduct Authority, allowing asset managers to bundle payments for research and trade execution once more.
David Enticknap, CEO of Extel, sees signs of recovery. He believes that research must be valued, and the buy side needs to recognize its importance. Enticknap emphasizes the need for fresh talent, a challenge in an era where young graduates are more drawn to tech than the City. This talent gap is a critical issue, as a good ranking in the Extel survey could once add thousands to an analyst's salary. The question remains: can the City of London entice young talent back to the world of brokers' analysts, a noble calling that once thrived in the heart of the financial district?
