MiFID II has shaken up the fund industry but relies too heavily upon what it was designed to prevent, according to Jean Keller, CEO of Quaero Capital.
In an investment commentary, the founder of the Geneva boutique said the core ideas behind MiFID II are welcome, but its long-term goals are predicated on how the market has functioned during an exceptionally calm period.
Keller said: ‘For many years now, regulators have insisted asset managers make clear on all documentation that past performance is not a guarantee of future results. But this new regulation produces exactly what it claims to prevent: relying on the past to predict the future.’
He also criticised MiFID II’s use of so-called stress tests, which offer a worst-case scenario based on performance data from the past five years. Considering the fact that many stock markets have performed well over the past few years, Keller argued that this use of more recent historical data has essentially minimised the appearance of risk, when in the event of a stock market crash the real outcome would be much worse.
Another feature of MiFID II is the obligation to differentiate between the transaction costs and those related to the acquisition of financial research.
Keller said most asset managers are paying for research themselves, which leads to a drop in demand for research produced by investment banks and brokerage firms, combined with an increasing demand for high-quality research.
As a consequence, there has been a reduction in the total volume of research requested, which has convinced research producers to cut down on the number of analysts.
This then limits the amount of research that is available to investors, particularly on small stocks, as the majority of analysts are now focusing on larger-cap firms.
However, MiFID II was designed to achieve the opposite result. Keller said: ‘The principles underlying the new rules are entirely honourable. They aim to increase transparency on costs and to improve information available so that investors can make an informed decision.’
Three months after the implementation of MiFID II, its full effects on the stock market have not yet been evaluated. Keller concluded that if these regulations actually succeed in making the market less transparent, then insiders would be able to take advantage of these opportunities.