Asset managers are fast running out of room to properly meet the demands of the MiFID II legislation and many are underestimating the sheer scale of the impact it will have on existing models.
That is the view of Lionel de Broux, head of funds at Banque Internationale á Luxembourg (BiL), who expects the latter half of 2017 to be dedicated to handling the practical implication of the regulatory change that comes into effect in January 2018.
'This is going to be a big challenge for the industry,' De Broux told Citywire Selector. 'Not just in terms of the impact for fund houses but for selectors, distributors and market participants as a whole.
'January 2018 is fast approaching and we are now fine-tuning our positioning and strategy in order to align ourselves with this new regulation.'
Focusing on his own work, de Broux believes the ‘target market’ obligations within MiFID II will be most time-consuming for companies such as BiL, which both manufacture and distribute, as well as select funds.
'We believe this will bring a revival for core/satellite investment strategies and allocation. Selectors will need to adapt accordingly to capture this new environment, and to cover additional regulatory requirements.
'Processes will need to be adapted to integrate target market characteristics and the match with distributors’ fund compliance,' he said.
De Broux said the role of active management has come under increased scrutiny as larger asset managers have sought to add passive elements. He thinks this will only intensify as AM firms seek cost and competitiveness gains around MiFID II.
'The new regulation implies that we will probably see more of a dichotomy between passive investment solutions and high alpha producers. In this challenging environment, core investment funds will lose attractiveness compared to pure passive solutions.
'However, it will also open the door for those real alpha producers who are ready to take risk in order to generate return. Obviously, some asset classes will continue to be particularly challenging for active management, for example US equity where passive management has dominated the league for years.'
When it comes to fund allocations, de Broux said investors are increasingly looking at ‘alternative’ allocations but this is blurring the lines between what qualifies under Ucits or Alternative Ucits banners and what is a traditional hedge fund.