When it comes to MiFID II, what does not kill active managers will make them stronger.
So say some industry analysts, whose views run counter to a common opinion among institutional investors — namely, that required research-cost transparency under the European Union's Markets in Financial Institutions Directive II will make it more difficult and costly for active money managers to obtain analysis on what stocks to buy or sell.
"MiFID II will force more managers to determine how carefully they use proprietary research to drive alpha," said Jeffrey A. Levi, Darien, Conn.-based principal at money manager consulting firm Casey Quirk, a practice of Deloitte Consulting. "It will drive a winners-vs.-losers dynamic. Some will perform better because of research, some won't. … It's going to accelerate the winner-take-all dynamic in the industry."
Under MiFID II, effective Jan. 3, all financial firms that do business in the EU or have clients in the EU will be required to disclose research costs as a distinct line item, rather than include them in bundled commissions with executions.
Although U.S. managers aren't required to follow the rules for domestic investments and clients, most are expected to comply with MiFID II because of their global reach and the difficulty in setting up two separate infrastructures — one regime to meet U.S. rules and another to follow EU regulations.
But not all active managers will be hurt. Many firms, particularly midsize firms, will be able to fund their own research through the reduced execution costs that are expected to result from the unbundling rule — and use more targeted research to generate more alpha, said Shannon Curley, CEO of the CFA Society Chicago.
For active managers, the benefits of unbundling include the reduced clutter of unnecessary analysis and the potential for greater use of technology to pinpoint what kind of research is providing the most alpha, Mr. Curley said.
"The sell side could be in trouble, but it will make buy-side analysts more valuable," said Mr. Curley. "I don't know of too many active managers who are upset about this rule."
Added Tim Cave, equity research analyst, TABB Group, London, "You'll see a genuinely competitive market for research. It'll be a lot more competitive, and that will lower costs. Fundamentally, there'll be more insight into costs and fees. That sort of reinforces the best-in-breed categories in active management. … Another benefit for active management will come from rules that will bring better execution quality. That hopefully will lead to a flight to quality in that regard."