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.