Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. MONEY MANAGEMENT
February 06, 2017 12:00 AM

Active managers facing new hurdle

Cost disclosure in MiFID II likely to add pressure over research fees

Rick Baert
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Jennifer Bishop
    Steven Glass believes investors might have 'sticker shock' over the costs of research.

    Active equity managers who've seen institutional clients move toward more passive investment in recent years have another potential roadblock to navigate in upcoming European regulations requiring research cost disclosure.

    The Markets in Financial Instruments Directive II, set to begin on Jan. 3, 2018, will require firms that do business or have clients in the U.K. and European Union countries to specifically disclose to clients the amount it charges them for research. While the Securities and Exchange Commission will continue to allow bundled commissions to incorporate research and trading execution in the U.S., most large money managers are expected to follow MiFID II rules globally as a matter of best practice, with other, smaller U.S.-based active managers following suit by demand of their institutional clients, sources said.

    “Research needs obviously are greater for active managers,” said Steven Glass, president and CEO of Zeno Consulting Group LLC, a Bethesda, Md.-based consultant to pension funds on trading issues. “The full size of that research has never been scrutinized. The first time managers provide these (research cost) notices to asset owners, there could be sticker shock. And that's exacerbated by managers having to get approval (from asset owners) to get the research. Managers will have to prove those costs are justifiable.”

    Good timing

    Sources said the timing of the MiFID II requirements could coincide with a more volatile market, which could make active management more attractive.

    “I am concerned that MiFID II could be an artificial stimulant tipping the scales toward passive management at a time when natural market forces are already at work creating greater demand for transparency and improved market returns,” said Thomas Conigliaro, managing director, global head of brokerage and research services at analytics provider IHS Markit Ltd., New York. ”We may be on the brink of increased equity performance, higher yields and higher volatility, which would naturally favor active management. The question remains whether these draconian regulations, designed to significantly impact active managers more than passive, may be occurring at an inflection point where active managers' performance is poised to improve.”

    Added Jack Pollina, managing director and head of global commission at brokerage and financial technology provider Investment Technology Group Inc., New York: “In the market we're under, passive has made more sense. But as volatility enters this market, I think active management may be a better play over time. But (unbundling) will give more transparency. Pension funds now will know exactly what they pay in commissions, research, execution. They'll be able to ask, "Why did one (manager) charge more than another?' It will create more dialogue. The asset manager will call out the broker. There'll be a lot more of that going on. I don't know if unbundling will be a driver to passive; I think most investors will still go with the best return.”

    Jeffrey Levi, principal at money management consultant Casey Quirk, a practice of Deloitte Consulting LLP, Darien, Conn., said he's seen “a real emphasis on portfolio cost vs. expected returns” from asset owners. “That ratio has been going up for years. Manager fees that were in the 10% range are now twice that because of return declines. That's why assets owners have reacted with passive investment and insourcing. MiFID II will accelerate this trend.”

    Passive investments as part of large U.S. defined benefit funds' overall U.S. equity allocations have increased over the past two years, according to data reported in Pensions & Investments' annual survey of the nation's largest retirement plans. Passive U.S. equity allocations comprised 54% of all U.S. equity investments for the largest 200 DB plans in terms of assets as of Sept. 30, compared with 51% two years earlier. Active, meanwhile, comprised 38% of U.S. equity allocations as of Sept. 30, down from 41% two years prior.

    Zeno's Mr. Glass said that, ultimately, asset owners will consider active management from either a quantitative or emotional perspective — with a quantitative view benefiting active managers while the emotional will target the increased research disclosure as yet another cost of active management at a time when asset owners want to reduce fees.

    Four benefits

    From a quantitative view, Mr. Glass said there are four benefits to active management from MiFID II: lower research costs, better execution, improved returns and more targeted analysis.

    “Changes that MiFID II will cause will only help active managers,” Mr. Glass said. “The most obvious reason is MiFID II rules will make the process managers need to follow for research costs more efficient than it has been historically. Today, I'd bet most managers couldn't tell you exactly how much research costs. We heard (through consultant Frost Consulting) that research costs are expected to fall 15% to 20% under MiFID II, because (the) only research that will be bought will be for specific client needs.”

    Execution will improve, he said, because selecting brokers for trades will be based solely on execution quality and not linked to research agreements that could previously have driven the selection of a broker.

    “Returns could bump up slightly because under MiFID II, managers can't do cross-subsidization, using equity research costs to pay for other kinds of research like fixed income. The research will pertain directly to the specific investment,” Mr. Glass said. “And MiFID II requires managers to think about research needs — what services truly provide value for certain investments. It links an actual value to an investment product. I think that's a healthy practice that will help investors.”

    The first year under MiFID II will be the hardest, said Zeno's Mr. Glass. “If you're emotionally already leaning toward passive, the first year of MiFID II, learning exactly what you're paying for research, that's going to be a hurdle, a challenge. If managers can survive that first year, the risk becomes much less. If after all the angst, the asset owner says OK to the research budget, the next year is more about what's changing from year to year. So, for active managers, the critical year will be the first year. In the next six to nine months, invoices will be reaching asset owners' desks. That will be the real test.”

    "Headline risk'

    Jeremy Wolfson, chief investment officer of the $10.3 billion Los Angeles Department of Water & Power Employees' Retirement Plan, said that while his plan's $5.3 billion equity portfolio is 80% active, he could see where “the new mechanics of MiFID II and the disclosure of the research fees may create headline risk, which could result in some funds re-evaluating their current passive/active exposures.”

    Mr. Wolfson said the increased transparency driven by MiFID II “is good for everyone. It may create some uneasiness at first, however, that should lead to more constructive conversations around fees that are charged to clients ... Fees are an important factor in evaluating new and existing mandates, however, it is not the only factor. Investors should also consider net-of-fee, risk-adjusted returns with investment managers that can generate sustainable alpha across an entire business cycle.”

    Money managers contacted for this story would not comment with attribution, with many citing their firm's policies that restrict comment on regulatory issues. But one, who spoke on condition of anonymity, said the best time for active management is when regulations change. “With all the nuances and changes, a great active manager is able to navigate the uncertainty and find opportunities,” he said.

    Related Articles
    Assets of top funds up 6.2% to $9.4 trillion
    Stress testing a new normal for investors
    Target-date mixing might not be taboo after all
    Greenwich Associates: Active management will survive but shakeup is expected
    Tradewatch: 2016 volatility ends on mild note after rough start
    European stocks coming back into favor
    Recommended for You
    GSAM's head of liquidity solutions to retire at end of year
    Asset managers affirm they'll pay for travel
    Asset managers affirm they'll pay for travel
    Matthew Beesley
    Jupiter Fund Management appoints new CEO
    ESG: Sustainability - Gaining Momentum
    Sponsored Content: ESG: Sustainability - Gaining Momentum

    Reader Poll

    July 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    July 4, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit