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Once upon a time, professional investors had a key advantage over everyone else. It wasn’t co-located servers or lascivious algorithms or financial nuclear weapons or black edge. (OK, so it was probably also a good deal of that last one.) It was that they knew stuff about the companies in which they invested, and the hoi polloi (such as they were at the time) didn’t. But then came the explosive growth and democratization of investment analysis, which ruined everything. Thanks, however, to European regulators, the pros have got that edge back, at a time when all of their others are going away.

Many sell-side outfits have scaled back their research as investors have spent less money on it since the rules were implemented. Some investors have built their own in-house research teams. The knock-on effect is analysts are covering some stocks in less depth or not at all. Hedge funds are seizing on this information asymmetry, sniffing out companies that have become cheaper due to their lack of coverage….

“Mifid II definitely had a degrading effect on the coverage of smaller companies. You’re down to four analysts or fewer for companies in the £300 million market cap area,” said Adrian Gosden, portfolio manager for a U.K. fund at Swiss manager GAM Holding AG…. The FTSE 250 index now has an average of 7.7 analysts per company, down from 9.3 analysts at the end of 2017, according to FactSet.

That’s a whole Dick Bové and more than half a Mike Mayo per company. Maybe Crispin Odey can get his buddies to go a step further and proscribe all sell-side research to give him the pick-me-up he so clearly needs.

Less Research Is No Problem for Investors [WSJ]


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