When Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates, looks at 2017 he seems to shake his head. “2017 was politically strange, economically strong and eerily calm,” he wrote in a report pointing to ten major market structure trends for 2018. The events framing 2018 that McPartland considers, when compared to the unpredictable events of 2017, point to the softer side of MiFID II, a turn to product-agnostic investing and data mattering more than trading and banks focusing more on cryptocurrencies than the distributed ledger technology that underlies the hot trading product.
MiFID II isn't that bad and passive investing will hit a limit at 40% of AUM
There are many concerns that worry those in financial services. This list could include MiFID II implementation, computer automation stealing human jobs and passive investing taking over active management.
The passive investing tide that is turning financial services into a “ hyper competitive and hyper disruptive” industry, Legg Mason chief executive officer Joseph Sullivan told the Financial Times. “It’s an incredibly challenging time. The industry is going to look very different when the smoke clears in five years.”
While asset manager industry profit margins are near an all-time high near 23%, Sullivan sees rising expenses, including technology, amid falling fee revenue from inexpensive passive investing products challenging the active management industry.
Others are more sanguine about the future, however.
McPartland, for his part, notes that while the growth of passive management has been strong, there is a practical limit to the wave challenging active managers. With passive investing currently accounting for 22% of assets under management, he points to the firm’s 2017 asset manager research that says the trend might end once passive hits the 40% mark.
“There is a limit here,” McPartland wrote. “If enough money passively tracks a set of indices, then the opportunities for alpha in active management will become too hard to resist and a balance will be struck.”
He thinks in 2018 “product-agnostic investing becomes more than just an idea,” but a point of daily execution. “Interest rate, credit and equity markets all offer liquid alternatives via swaps, futures, options, and ETFs,” it’s just a matter of recognizing which has the least basis risk, lowest cost, most liquidity, and true best execution.
“The robots have finally arrived to help” with this executional task, he says amid a world where “alternative data becomes less alternative” and “data matters more than trading.”
While robots may have finally arrived, McPartland thinks they will not result in the death of the asset management industry. “Robo-advisors are an opportunity, not a threat,” he says, pointing to a future where computers and human advisors co-exist to provide a better service. The bull market may not last forever, however. “If the market decides to correct, as baby boomers pull out more money than millennials put in, this party might not last forever.”
MiFID II: Don't fear the reaper, regulators are working with financial services firms
Early signs from professional investors are “initial relief” at the “smooth launch” of MiFID II regulations, which McPartland view from the perspective of a “soft launch.”
McPartland thinks regulators will take an understanding tone with financial services firms and work with them, not against them, in ensuring new regulations are followed.
“We should expect some short-term hiccups that include some counterparties not interacting with one another because of incomplete processes or legal work, non-European firms opting to interact with other non-European firms, and manual work-arounds involving junior staff where technology isn’t yet built,” he wrote of a year in which he thinks “regulators get things done.”
“Unfortunately for compliance operations and technology teams, more late nights are still to come, as they work to transform the current ‘Let’s make sure we’re compliant’ implementations into permanent, enterprise-grade installations,” he wrote