Mifid II to boost passive exposure

Europe’s passive funds will be given a boost in 2018 at the expense of active funds thanks to Mifid II’s drive for cost transparency, according to research firm Cerulli Associates.

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The revised version of the Markets in Financial Instruments Directive (Mifid II) will come into effect from 3 January.

“We believe that Mifid II’s drive for transparency on costs will shift the balance further in favour of passive investing. But passives might not need any regulatory help to boost their cause,” according to Cerulli director for European retail research, Angelos Gousios.

Writing in the latest report from the global research and consulting firm, Gousios also forecast demand for funds that met various environmental, social, and governance (ESG) criteria would swell this year and said emerging markets could be the asset calls to prove the best bet among equities.

“With data suggesting that EM funds are no more likely to beat their benchmark than others, there may be easier money in passives, including exchange traded funds,” Gousios said.

Passive to benefit

Cerulli expects that investors sticking with developed markets in 2018 would increasingly opt for passives, either plain vanilla tracking the likes of the S&P 500, or a smart beta variation.

Its latest report, ‘The Cerulli Edge – European Monthly Product Trends’, found the top three European passive emerging markets fund managers, Blackrock, Vanguard Group, and UBS AG, in October 2017 accounted for €62.8bn (£55.9bn) in assets under management.

According to research and consultancy firm ETFGI’s latest ETF and exchange traded product (ETP) report, there were more net inflows, percentage wise, into active ETFs than into smart beta ETFs in the first 11 months of 2017.

The firm found that active ETFs/ETPs gathered $24bn in net new assets over the period compared with $69bn for smart beta ETFs/ETPs.

However, this represented 141.2% more net inflows for the whole of 2016 for active ETFs/ETPs compared with 22% for smart beta ETFs/ETPs. Assets invested into active ETFs/ETPs grew by 53.4% year-to-November 2017 compared with 30.1% for smart beta ETFs/ETPs.

“The majority of these [active ETF/ETP] flows can be attributed to the top 20 ETFs by net new assets, which collectively gathered $14.06bn during 2017. The Pimco Enhanced Short Maturity Strategy Fund on its own accounted for net inflows of $2.24bn,” ETFGI said.

For smart beta ETFs/ETPs, the majority of the flows could be attributed to the top 20 ETFs by net new assets, which collectively gathered $33.84bn during 2017. Blackrock’s iShares Core S&P Small-Cap ETF on its own accounted for net inflows of $6.51bn.

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