Investing

Lasting Provider Shakeup Expected From Passive Investing Shift

Over the past decade almost $3 trillion has moved from discretionary stock-picking funds to index-aligned investment strategies, according to TABB Group’s latest research, driven by both U.S. and European regulation. 

By John Manganaro editors@assetinternational.com | April 17, 2017

A new analysis published by TABB Group, “U.S. Institutional Equity Trading 2017: In the Eye of the Storm,” suggests there is a clear lack of preparation among some U.S. asset managers and their clients pertaining to shifts in the way institutions access and pay for investment products.

“The interview-based study of 95 head and senior traders of U.S. equity asset managers and hedge funds determined that over 95% of U.S. equity funds have been impacted by investors’ move from actively managed funds to passive strategies,” researchers explain. “The data shows a considerable number of managers both large and small do not have a strategy to counter this trend.”

TABB Group reports a range in strategies/responses currently playing out among asset managers that formerly focused mainly or exclusively on active management: “Responses to the shift vary greatly, ranging from just hoping this trend changes (35% of total response) to working to reduce their cost structure (11%), with everything in-between.”

The research argues that a push for unbundled, open architecture products and services that shy away from active management is far from a U.S.-only phenomenon. In fact, “as the threat of passive investing hits fundamental institutional investors head on, U.S. active managers are also increasingly being dragged into the new European rules that force funds to restructure the way they obtain investment ideas and procure research.” Fully 76% of U.S. managers expect to be impacted by European unbundling rules, up from 66% a year ago.

One of the main challenges in this area, according to TABB Group analyst and report co-author Valerie Bogard, is that “virtually all larger funds” will need to “restructure the way they procure research” pertaining to the European market.

“Larger funds are more impacted and more prepared than smaller funds,” Bogard adds. “Many smaller funds have not even started analyzing the impact of unbundling on their business.”

Overall, TABB Group finds the combination of the move toward passive investing, unbundling, and low volatility has the U.S. equity institutional investor commission pool down 7.5% from 2015. This implies real and lasting consequences for investing providers and their clients.

The full analysis can be downloaded at https://research.tabbgroup.com/search/grid