Ron Kruszewski, president and chief executive officer of Stifel Financial, believes his firms trading desk will benefit from an increase in active investing in the coming years.
We have a big investment in research, Kruszewski said at KBW Securities Brokerage & Market Structure Conference in New York last week, and I believe it will pay dividends in the future. Compared to the last four years, I believe that active management will outperform passive management.
In the immediate aftermath of the stock market crash of 2008, many investors spurned equities for bonds and other investments. Monies earmarked for stocks often went into passive mutual and exchange-traded funds. Active managers lost out.
According to data from the Investment Company Institute, the percentage of funds in passive equity mutual funds grew from 11 percent of total equity mutual funds in 2007 to 17 percent in 2012.
Active management suffered during the crisis years because there was nothing to gain by picking stocks, according to Kruszewski. Due to investor fears, prices of stocks moved in lockstep, or were correlated, according to the jargon.
During the last four years, it seemed like everything was correlated, Kruszewski said. That led to more passive management. But, as I look forward, I see active management providing more alpha than the passive. That will help drive returns for our equity platform.
Correlation has declined in the past two years. According to data from Morgan Stanley, the one-year realized correlation for the top 50 stocks in the S&P 500 Index stood at 40 percent earlier this year. Thats down from a high of nearly 80 percent in early 2012 and comparable to levels in 2007.
With its acquisition of Keefe, Bruyette & Woods last year, Stifels equity research operation now covers 1,341 stocks, according to data from Stifel. That is more than any other U.S. brokerage.
The bulge bracket no longer dominates the provision of research. According to a recent joint report from the U.K.s Frost Consulting & Advisory and Quark Software, the major global investment banks cut their spending on research from $8.2 billion in 2008 to $4.8 billion in 2013, a drop of about 42 percent.
In the U.S., among the Top 5 research shops are two regional brokers: Stifel and Raymond James, according to Stifels data.
Still, a strong research offering may not convince many money managers to send flow to a brokerages trading desk. Commission sharing, whereby commissions are split between an executing broker and the provider of research, has become very popular. Some buysides would rather send a check to the broker supplying the research, but the actual order to a preferred trading desk.
The percentage of total commissions paid via CSAs in the U.S. was 34 percent in 2012, according to Greenwich Associates, up from 18 percent in 2008.
