Hardman & Co: UK small caps and Aim firms increase coverage post-Mifid

Analyst coverage of UK small caps and companies listed on London’s Alternative Investment Market (Aim) actually increased over the 12 months following the implementation of Mifid II, according to new research from Hardman & Co – a finding that goes against pre-Mifid predictions. 

‘Coverage of Main Market small caps and Aim companies across the market-cap spectrum increased 15.6 percent and 7.9 percent, respectively,’ notes the research. ‘The analysis indicates about one in two Aim stocks has acquired an extra analyst over the past two years, amid encouraging signs brokers may be investing in research where coverage is thinnest,’ says Hardman & Co in a statement announcing the findings. 

At the same time, the findings show coverage reductions as a result of the regulation have been most pronounced across large-cap companies.

Average analyst coverage per large-cap stock on the London Stock Exchange (LSE) Main Market was down 7.4 percent over 2018, says the research provider and consultant. Though this is the highest reduction in terms of percentage points, Hardman & Co says it translates only to a drop from an average 15.8 analysts per company to 14.7. 

Mid-cap stocks on the LSE Main Market saw a 3.1 percent decline, to an average 6.4 analysts, adds Hardman & Co.

‘A year on from Mifid II, we may be seeing a reallocation of broker research resources from well-researched large-cap stocks toward smaller-cap companies,’ comments Keith Hiscock, CEO of Hardman & Co, in the statement. ‘But coverage of the largest stocks continues to dominate research output and most companies still struggle to have their story told by more than two or three analysts.

‘While large-cap CFOs and IR officers facing double-digit numbers of research analysts may delight in having slightly fewer to deal with, smaller company boards should push for any increase in volume to be backed by sustainable in-depth analysis, which is not restricted from reaching smaller companies’ specialist end-investors.’

The findings come after the UK’s IR Society told IR Magazine almost 60 percent of its FTSE 250 and small-cap members had reported a one or two-analyst drop in coverage. And despite Hardman & Co’s finding that small-cap and Aim-listed companies have actually seen an uptick in coverage, Hiscock says ‘it will take time for the dust to settle’ – warning of further potential cuts for the year ahead. 

‘Like it or not, the Mifid II reforms have fundamentally changed brokers’ business models,’ he explains. ‘The latest evidence [from the Quoted Companies Alliance] shows many institutional investors are seeing less research, often of lower quality, with less broker engagement to back it up. In research, as with corporate reporting, the devil is often in the detail – which these new models fail to provide.

‘With fund managers reported to be making double-digit cuts to research budgets as they enter the second year under Mifid II, companies will continue to face challenges in securing high-quality research coverage from well-respected analysts that reaches their end-investors, without commissioning it directly.’

He adds that there is ‘no single quick fix’ to the problem and recommends companies ‘consider broadening their investor relations activities to reach investors through other channels’.

Finally, Hardman & Co highlights another cause for concern: reduced liquidity. Since the implementation of Mifid II, average stock liquidity has dropped more than 13 percent on the LSE Main Market, it says.