It is a given that most funds are best used as long-term investments. Their cost structures as well as potential tax hits from selling help dictate this, as do the nature of their use as retirement saving vehicles.
In this context, the level of creation and elimination of funds in Europe and the UK appears high. Using the survivorship-bias-free databases at Morningstar, which retain records of funds that no longer exist, several headline figures jump out. At present, we track 36,500 funds domiciled in Europe (2,829 of which are domiciled in the UK). Of these, 12,918 have been launched since the start of 2008 through the end of 2012. Over the same period, 17,837 funds in Europe have been eliminated, either through merging with another entity or via outright liquidation. Put differently, over that five-year period, the number of new funds launched equates to 35% of the current universe size, and the number of closures equates to 48% of the current universe size.
Some of the liquidation activity, particularly on the continent, owed to consolidation of fund ranges on the back of fund house mergers during the crisis. Nonetheless, the effect isn’t exceptionally large--relative to 2010, 2011, and 2012, the closure data show a light uptick in 2008 and a material one in 2009. However, if we replace the figures for those years with the annual average from 2010-2012, we still see 15,700 closures, about 43% of the present universe size. The UK saw new launches equating to 34% of the current universe size and closures equating to 37%. The latter is notably smaller than the overall ratio for Europe, which reflects the fact that UK domiciled funds were less hard hit than prominent continental markets by closures in 2008 and 2009.
In 2012, the level of activity remained high, with 3,063 funds eliminated and 2,372 launched across Europe (247 of the eliminations and 147 of the closures were of UK domiciled funds). Although relatively small in absolute size, the additions to Alternative open-end funds and to open-end derivative- or physical commodities funds led the pack with increase equal to 16% and 14% of their current universe size, respectively. Perhaps not surprisingly, both categories were the only two with a material net positive increase over the past five years, with increases in number of funds equal to 26% of the current universe for alternatives and 50% for commodities. To put that in perspective, the next highest increase was among Property funds, which saw an increase equal to 4.3% of the current universe size.
The growth in alternatives and commodities funds reflects the search by investors for funds offering low correlation with traditional asset classes, and the fund houses’ rush to fill this demand. Such innovation isn’t bad--indeed, it can have great benefits to investors. On the other hand, there is usually in these scenarios a substantial “me-too” component that sees fund houses with no previous known strength in an area try to benefit from investor demand. The latter is a clear concern as is more broadly the extremely high level of turnover in the European fund universes, which suggests too many fund houses view funds as something more akin to products to be tried out on the market rather than long-term investment vehicles. If they don’t work, they are closed and replaced with new launches. Caveat emptor.
This Morningstar article originally appeared in Investment Adviser.
