This blog post originally appeared on FTAdviser.
In the years leading up to the financial crisis, the European fund industry underwent an expansion characterised by a huge proliferation of funds. Indeed, even now, after nearly two years of contraction, Morningstar currently tracks 37,000 funds across Europe, with nearly 73,000 share classes. But still, the industry continues to launch new offerings, and the latest data show closures are slowing sharply.
For the year to date in 2010, we track 2,709 closures and 2,388 launches, for a net shrinkage of 321 funds. As a point of comparison, in 2009 we tracked 5,158 closures and 2,686 launches, giving a net change of minus 2,472. 2010 is not yet over and there is generally a lag to the data for closed funds, so the final number of closures is likely to be higher--but the shift is evident.
The rapidity of the closures in 2009 reflects the fact that many funds were too small to stay viable once the downturn set in. It also followed on the forced combination of many fund houses in the heat of the credit crunch as many fund line-ups had to be merged.
It is understandable then, that the level of closures would fall off in ensuing years.
Nonetheless, the overall number of funds remains high and the level of launches, although lower than in the past, remains notable in our view. This is indicative of the focus on selling product that has become the industry’s hallmark.
Unfortunately, as it stands, funds are usually sold rather than bought as investments, and large sums are paid--usually of investors’ own money in the form of commissions--to fund the sales effort. This sales oriented approach creates a perverse incentive for asset managers to create “product”, especially in hot-areas of the market in the hopes of attracting assets in the near term.
In the UK, the RDR may help change that, though we’ll have to see how it plays out in practice. There’s a precedent in the Indian market, which had faced similar problems in the past. There, the local regulator has simply done away with initial sales charges, although trail commissions are still permitted.
Investors now will largely have to pay their advisers directly for services rendered. It’s early days, but the hope is that such rules will increase transparency around the fees investors are paying for advice and remove the incentive for firms to treat funds as hit-or-miss products to be sold rather than investments to which people are entrusting their financial futures.
