The implementation of new European regulations on the financial services industry earlier this year has resulted in a number of changes for the way asset managers operate.
Investors now have greater transparency over costs as asset managers are required to disclose transaction charges for the funds they oversee under Mifid (Markets in Financial Instruments Directive) II.
However, the regulations have also had an impact on how fund managers access and pay for investment research.
Pre-Mifid II, banks and brokers would often provide research to asset management clients who placed trading orders with them. However, under the new regulations that is now considered an inducement and managers must now pay for research.
With asset managers under increasing pressure from cheap exchange-traded funds the pressure to reduce fees at a time when the regulatory burden has increased, forcing managers to pass on the costs to investors or cut back on research.
While the wider market is still at an early stage of assessing the impact of the Mifid II regulations on the industry, some fund managers have begun to reflect on the implementation of the rules earlier this year. 
Stephen Yiu (pictured), chief investment officer at recently-launched start-up Blue Whale Capital, said the new regulations caused many asset managers to question how they pay for sell-side research over the longer-term.
Yet, the regulations also posed another more important question of fund managers and how they operate, according to Yiu.
He said: “We have only one simple question to ask: Why were asset managers using it so extensively in the first place?
“A manager who relies on sell-side research does one of two things,” Yiu explained. “Either they run a diversified portfolio with 50 or more stocks which is more than likely a closet index-tracker or they run high positions in stocks where they have little conviction which is a recipe for disaster.
“In order to outperform the index, a manager needs to run a concentrated portfolio and they need to perform their own proprietary in-house research.”
The Blue Whale manager added: “We believe investors should not consider investing in a fund where either of these criteria are missing.”
The fund manager said it was difficult to understand how a fund manager could achieve a high conviction in companies by relying solely on sell-side research, noting that in a concentrated fund, Yiu said, the performance of each holding is material.
Additionally, YIu said managers who rely on sell-side research are more likely to be caught out by any change in market leadership, which is particularly relevant as commentators begin anticipating the end of the cycle and a shift from growth to value.
The impact of the new regulations has been more keenly felt in more under-researched parts of the market.
Indeed, FE Alpha Manager Ken Wotton (pictured) said the Mifid II regulations had the potential to restrict coverage of under-researched areas further.
The micro- and small-cap space is already under-researched, said Wotton, as it is not usually economically viable for brokers to cover these stocks unless it is paid for by the company itself.
“As the regulation will likely lead to less insight and research, investors considering smaller quoted companies will be faced with less information to aid investment decisions,” said the manager. 
However, Wotton – who manages the £159.8m five FE Crown-rated LF Livingbridge UK Micro Cap fund – said more limited coverage can often offer up opportunities for investors.
The FE Alpha Manager said because smaller companies tend to fall under the radar they can often trade at a discount to their larger, more well-known peers.
Fund managers who are more reliant on sell-side research may have already seen a rise in costs since the implementation of the rules at the start of the year, said Wotton.
However, it remains too early to assess the potential fall-out in terms of research coverage of the smaller companies space.
The Livingbridge manager explained: “Anecdotally we believe banks and brokers are considering rationalising coverage to those sectors where they are strongest but any material reduction in analyst headcount or coverage will take some time to play out fully.”
As such, the advantage lies with firms that are able to conduct their own research and identify potential investments, according to the FE Alpha Manager.
Wotton added: “While Mifid II will likely result in even further reduced analyst coverage of smaller companies, investors can still turn to specialist smaller company managers with in-house research capacity to look for long-term returns.”