Institutional investors are facing difficult challenges including passive investing, unbundling and cost pressures, according to TABB Group’s latest research – US Institutional Equity Trading 2017: In the Eye of the Storm.
According to the research, the reallocation of assets from active, fundamentally-based investment strategies to passive/ETF index-based products has the industry on edge. Over the past 10 years almost USD3 trillion has moved from discretionary stock-picking funds to index-aligned investment strategies.
In addition, as the European Union regulators look to implement MiFID II unbundling regulation in January 2018, it is becoming increasingly apparent that US investors will be dragged into complying with rules on how they obtain, value, and pay for investment research. The research shows how unprepared the US institutional investor community is for either of these challenges.
The interview-based study of 95 head and senior traders of US equity asset managers and hedge funds determined that over 95 per cent of US equity funds have been impacted by investors’ move from actively managed funds to passive strategies. The data shows a considerable number of managers both large and small do not have a strategy to counter this trend. Responses to the shift vary greatly, ranging from just hoping this trend changes (35 per cent of total response) to working to reduce their cost structure (11 per cent) with everything in-between.
As the threat of passive investing hits fundamental institutional investors head on, US active managers are also increasingly being dragged into the new European rules that force funds to restructure the way they obtain investment ideas and procure research with 76 per cent of US managers expecting to be impacted by the MiFID II unbundling rules up from 66 per cent a year ago.
“Virtually all larger funds will need to restructure the way they procure research,” says TABB Group analyst and co-author Valerie Bogard (pictured). “Larger funds are more impacted and more prepared than smaller funds. Many smaller funds have not even started analysing the impact of unbundling on their business.
“The combination of the move toward passive investing, unbundling, and low volatility has the US equity institutional investor commission pool down 7.5 per cent from 2015.”
The research documents the rise of passive investing, impacts of MiFID II on US investors, the buy-side’s top initiatives, calculating the value of the broker relationship, impact on brokers and exchanges, and institutional investors views on market structure change.
