Adapting to the New Reality – Tabb’s 2018 Institutional Equity Trading Study
Posted on Tue, Aug 7, 2018 @ 8:00
By Dayle Scher, Tabb Group Originally published on the TabbFORUM
Intensifying regulatory requirements and the shift to passive investing have increased the pressure both on the buy-side and the sell side. Tabb Group’s 2018 U.S. Equity Trading Study examines how the industry is responding and how buy- and sell-side firms must restructure their businesses to succeed. Report author Dayle Scher provides an inside look at the study’s findings, including investment managers’ top fears.
If 2017 was the Eye of the Storm, 2018 is the reassessment and response. MiFID II has become 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 has managers in a vice, pressuring them to adapt, perform or die.
Tabb Group’s 14th annual benchmark report, “U.S. 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 92 heads of trading at buy-side firms, the report covers the influence of MiFID II on U.S. 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 pursuing to adapt and overcome these critical challenges.
Despite the major tax reform, the strongest U.S. equity market in more than three decades, and the initial rolling back of the 2008 financial crisis regulation, much of the U.S. buy-side is anxious about its future. And there is plenty to worry about, as expected rate hikes are materializing; U.S. political and economic policy moves toward isolationism; the White House ignites a global trade war; and geopolitical uncertainty in the Middle East and North Korea doesn’t appear as if it will be resolved any time soon. Many pundits believe the U.S. market is severely overvalued and poised for a correction.
At the same time, U.S. investment management industry profits remain under pressure, even as assets under management have grown, as U.S. investors continue to shift toward lower-cost passive investments and funds struggle to restructure their operations globally because of the implementation of MiFID II.
While flow into passive funds is not going to subside, the nature of our markets is changing; the tax cuts, tariffs and political uncertainly will create more opportunities for active management, as these issues will impact companies differently. However, the impact on investment fees is irreversible.
The biggest anxiety-inducing force remains the implementation of MiFID II in Europe in January 2018 and whose specter looms across the U.S. capital markets (see Exhibit 1, below) as the number of MiFID II-impacted buy-side firms has been growing. This year, 87% of U.S. firms expect to be impacted by MiFID II, compared with 76% of the asset managers we surveyed last year and 66% in 2015 (see Exhibit 2, below).
Exhibit 1: Top Trends for the Buy-Side in 2018 Source: Tabb Group
Exhibit 2: MiFID II Impact to the Buy-Side Source: Tabb Group
As the industry wrestles with MiFID II, firms increasingly are working in a fee-constrained environment, with the flow of assets from active to passive investments continuing. 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, and we continually heard in our interviews that the accessibility and fee difference of passive investments pushes funds to deliver performance if they want to earn an active premium.
The reaction to this passive shift differs across the industry. 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 and expanding into new asset classes. Only a small number of active managers have looked to reduce their fee structure in response. This contrasts dramatically with last year’s results, when 35% of respondents said they were waiting and watching and 65% were responding (see Exhibit 3, below).
Exhibit 3: Funds’ Reaction to the Growth of Passive Investments Source: Tabb Group
The one significant takeaway we found in interviewing almost 100 major investment managers was that virtually all firms – no matter their style, size or investment bias – were being squeezed to reassess their value proposition. Firms must continually examine their market positions and their growth strategies in this expense-laden and reduced-management-fee environment. While active management is far from dead, active managers must distinguish themselves as investors continue to be presented with lower-cost and easier-to-access investment options. Whether that is by achieving cost reductions presented by operational efficiencies, implementing emerging technologies or expanding into new investment strategies, they must act now, or risk being marginalized later.
Tabb Group’s 14th Annual Institutional Equity Trading Study <link> interviewed 92 buy-side head traders at more than 100 firms during the first and second quarters of 2018 to understand how regulation such as MiFID II, the shift to passive investing and other industry trends are changing the buy-side’s needs and driving business transformation. Aligned with the release of this year’s study, Tabb Group is presenting a preview of our research in a three-part webinar series, starting Wednesday, July 25. Please click here for more information and to register.
Adapting to the New Reality – Tabb’s 2018 Institutional Equity Trading Study
By Dayle Scher, Tabb Group
Originally published on the TabbFORUM
Intensifying regulatory requirements and the shift to passive investing have increased the pressure both on the buy-side and the sell side. Tabb Group’s 2018 U.S. Equity Trading Study examines how the industry is responding and how buy- and sell-side firms must restructure their businesses to succeed. Report author Dayle Scher provides an inside look at the study’s findings, including investment managers’ top fears.
If 2017 was the Eye of the Storm, 2018 is the reassessment and response. MiFID II has become 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 has managers in a vice, pressuring them to adapt, perform or die.
Tabb Group’s 14th annual benchmark report, “U.S. 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 92 heads of trading at buy-side firms, the report covers the influence of MiFID II on U.S. 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 pursuing to adapt and overcome these critical challenges.
Despite the major tax reform, the strongest U.S. equity market in more than three decades, and the initial rolling back of the 2008 financial crisis regulation, much of the U.S. buy-side is anxious about its future. And there is plenty to worry about, as expected rate hikes are materializing; U.S. political and economic policy moves toward isolationism; the White House ignites a global trade war; and geopolitical uncertainty in the Middle East and North Korea doesn’t appear as if it will be resolved any time soon. Many pundits believe the U.S. market is severely overvalued and poised for a correction.
At the same time, U.S. investment management industry profits remain under pressure, even as assets under management have grown, as U.S. investors continue to shift toward lower-cost passive investments and funds struggle to restructure their operations globally because of the implementation of MiFID II.
While flow into passive funds is not going to subside, the nature of our markets is changing; the tax cuts, tariffs and political uncertainly will create more opportunities for active management, as these issues will impact companies differently. However, the impact on investment fees is irreversible.
The biggest anxiety-inducing force remains the implementation of MiFID II in Europe in January 2018 and whose specter looms across the U.S. capital markets (see Exhibit 1, below) as the number of MiFID II-impacted buy-side firms has been growing. This year, 87% of U.S. firms expect to be impacted by MiFID II, compared with 76% of the asset managers we surveyed last year and 66% in 2015 (see Exhibit 2, below).
Exhibit 1: Top Trends for the Buy-Side in 2018
Source: Tabb Group
Exhibit 2: MiFID II Impact to the Buy-Side
Source: Tabb Group
As the industry wrestles with MiFID II, firms increasingly are working in a fee-constrained environment, with the flow of assets from active to passive investments continuing. 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, and we continually heard in our interviews that the accessibility and fee difference of passive investments pushes funds to deliver performance if they want to earn an active premium.
The reaction to this passive shift differs across the industry. 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 and expanding into new asset classes. Only a small number of active managers have looked to reduce their fee structure in response. This contrasts dramatically with last year’s results, when 35% of respondents said they were waiting and watching and 65% were responding (see Exhibit 3, below).
Exhibit 3: Funds’ Reaction to the Growth of Passive Investments
Source: Tabb Group
The one significant takeaway we found in interviewing almost 100 major investment managers was that virtually all firms – no matter their style, size or investment bias – were being squeezed to reassess their value proposition. Firms must continually examine their market positions and their growth strategies in this expense-laden and reduced-management-fee environment. While active management is far from dead, active managers must distinguish themselves as investors continue to be presented with lower-cost and easier-to-access investment options. Whether that is by achieving cost reductions presented by operational efficiencies, implementing emerging technologies or expanding into new investment strategies, they must act now, or risk being marginalized later.
Tabb Group’s 14th Annual Institutional Equity Trading Study <link> interviewed 92 buy-side head traders at more than 100 firms during the first and second quarters of 2018 to understand how regulation such as MiFID II, the shift to passive investing and other industry trends are changing the buy-side’s needs and driving business transformation. Aligned with the release of this year’s study, Tabb Group is presenting a preview of our research in a three-part webinar series, starting Wednesday, July 25. Please click here for more information and to register.
Originally published on the TabbFORUM
This column does not necessarily reflect the views or opinions of FinReg Alert or Tradeweb Markets LLC.
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