More and more people are putting money into passive index-tracking funds rather than active stock-picking managers, according to European traders who are concerned about the impact this will have on their business.
In a survey conducted by the SIX Swiss Stock Exchange, a huge 88 per cent of traders have seen a shift towards passive investing and 72 per cent expect this to rise next year.
A hefty 85 per cent believe a rise in passive investing could provoke a change in global markets. But only 40 per cent see this as positive for their companies.
“Our survey results show the rise of passive investment is set to continue, but there are concerns about what this may mean for global markets,” said SIX's London director Tony Shaw.
At the same time, there are plenty of other challenges for traders on the horizon – the biggest being regulation coming into effect in 2018.
Almost a third of investors said the second Markets in Financial Instruments Directive (Mifid II) was driving the rise in passive investing, as one of its aims is to increase the transparency in fees charged to clients. This is forcing some active managers to prove their worth above passive funds or lower their costs, in order to keep clients. Cost efficiency was the most common reason given for the move towards passive funds.
Regulation such as Mifid II was also more broadly named by traders as the biggest challenge over the next 12 months, with 73 per cent saying they were feeling its impact more than any other issue.
However, 74 per cent of traders said the lack of liquidity in global markets was a problem – mainly in the fixed income sector such as bonds, but closely followed by equities.
In terms of what is driving trading activity, 46 per cent said it would be the activity of the European Central Bank. Almost a quarter again mentioned Mifid II, while 16 per cent put the buck on US President Trump and 11 per cent on Brexit.