US Institutional Equity Trading 2018: Adapting to the New Reality
If 2017 was the Eye of the Storm for the investment management industry, 2018 is proving to be the year of reassessment and response. Alignment with MiFID II is becoming table stakes, as U.S. investors and consultants come to expect the same transparency as their European counterparts. At the same time, the continuing flow of assets from active management to passive investments is putting more pressure on managers to adapt and perform.
TABB Group’s 14th annual benchmark report, “US Institutional Equity Trading 2018: Adapting to the New Reality,” examines the impacts of this two-pronged attack on the buy side and how equities participants are fighting back. Based on interviews with over 100 heads of trading at buy-side firms, the report covers the influence of MiFID II on US investment managers, the reallocation of assets to passive/ETF index-based products, the buy side’s relationship with the sell side, and the top technology initiatives the buy side is adopting to adapt and survive these critical challenges.
The biggest anxiety-inducing force identified in the study is the implementation of MiFID II in Europe in January 2018 and whose specter looms across the US capital markets.
The number of impacted buy-side firms has been growing as MiFID II has gone from concept, to regulation, to law. This year, 87% of firms expect to be impacted by MiFID II, compared with 76% of the asset managers we surveyed last year and 66% in 2015.
The second biggest challenge to U.S. investment managers as identified in the study is the continuing flow of active money to passive investments. While the early volatility of 2018 seems to have taken the bloom off the rose of the mad rush of assets into passive investments, 2017 saw record flows into passively managed U.S. mutual funds and ETFs, as an estimated $692 billion flowed into passive funds.
The reaction to the impact of the shift to passive investing differs across the buy side. A notable two-thirds of the active managers TABB surveyed are doing nothing in reaction, believing that the tide will inevitably turn as volatility returns to the market. The remaining one-third are proactively taking steps to compete, mainly by introducing their own passive strategies or enhancing their existing active strategies or expanding into new asset classes. Only a small number of active managers have looked to reduce their fee structure in response. This compares dramatically with last year’s results, when 35% of respondents said they were waiting and watching and 65% were responding.
Firms of all sizes and types must seize the opportunity to reassess their position in the market relative to these external pressures, and to reexamine their strategies for growing assets in an intensified environment of increased costs (i.e., for research and regulatory compliance) and reduced management fees. While active management is far from dead, active managers must distinguish themselves from their competitors and from passive managers in terms of performance, as investors continue to be presented with lower-cost and easier-to-access investment options. Whether that is by achieving efficiencies presented by emerging technology or by expanding into new asset classes, they must act now rather than waiting for a market correction.