McLean, managing director at SVM Asset Management, said the incoming regulation will lead to asset managers taking the knife to research budgets and cutting back the number of brokers they use.
He said anecdotally asset managers’ budgets are being slashed by about 50%, which places pressure on the larger brokers and investment banks that provide them with research to look elsewhere for commission.
Previously, these brokers commanded annual fees in the region of £50,000 to 60,000 for research as part of overall trading commissions, he added.
But SVM expects, for example, a fixed 20 basis point (bps) commission charge for dealing in UK equities to fall to 5-8bps, typically, and to as low as 3bps for large liquid cap dealing.
McLean said this drop in commission will lead to a significant decrease in the volume of broker-led research on the biggest companies that make up indices, which poses a threat to passive managers buying these stocks.
He explained: “As more investment in very large stocks goes to passives and closet trackers, the largest brokers and investment banks will find it difficult to collect fees in this area.
“Investment banks are likely in time to turn more attention to research and execution in second-line and mid-cap stocks where there’s more mispricing and potential for reward.
“Passive managers are buying stocks blind each month just because they are in the index and it might be that there is just not enough research or trading to get to the true value of those things.”
As a result, McLean anticipated an increase in active managers looking down the FTSE cap spectrum to areas they can find alpha and add more value.
He added: “This creates opportunities for managers who truly understand those areas of the market and conduct their own fundamental research.”
