Fund investors who stayed the course were rewarded in the second quarter as a number of downtrodden areas of the market sprang sharply back and all major equity market indices delivered positive returns. As a general rule, riskier areas shunned by investors in 2008 proved particularly strong, while defensives weakened, and this held true across equities and bonds. Emerging-markets equity funds soared, small caps strongly outperformed large-caps, and lower-quality credits outperformed safer government debt.
The pace of fund closures remained extremely high in the quarter. If it continues--and for reasons set out below, we firmly believe it should--the 2009 closure rate is set to handily eclipse the already elevated level registered in 2008. The closures are being driven by dramatically shrunken asset bases, the need to rethink fund line-ups that haven't served investors needs well in many cases, and the ongoing consolidation among asset managers.
Industry trends: the consolidation continues; trackers get cheaper in UK market
After years of expansion that we consider far too rapid, the fund industry has been shrinking fund lineups at a rapid clip. The trend started in 2007, increased greatly in 2008, and is moving at an even faster rate thus far in 2009. In the first six months of the year, 3,821 fund classes closed, on pace for nearly 7,650 on the year--which would be a big jump from 5,223 that closed in 2008 and nearly five times the number that closed in 2006.. Of the closed classes, 70% were outright liquidations, and 30% were merged into other fund classes.
At a macro level, we think the closures are for the best--during the boom years, fund houses came out with far too many niche funds in a short-term effort to gather assets. As we've said before, fund companies that want to build a durable business will do so not by making a grab for the hot money, but by offering a responsible fund line up that reflects the firm's expertise and is designed to offer sound long-term investments to investors. To the extent the ongoing consolidation cleans up some of the excesses of the bull years, that's a welcome change.
However, in the near-term, investors and their advisors need to watch fund closures carefully. Fund companies all too often merge funds into other offerings that aren't closely aligned, or leave a fund sitting mostly in cash as it's liquidated. This can wreak havoc with asset allocation programs. Our view is that any merger or liquidation ought to trigger a new search for the best available similar fund to replace the one that is being closed--there's no justifiable investment reason (except perhaps taxes) to permit the asset manager to merge your money into another of their funds rather than taking the opportunity to upgrade to a better offering from a different house.
We note that Vanguard entered the UK market in June with a range of ultra cheap trackers. The firm already had an institutional range in Dublin, but is pitching these offerings to UK fee only planners and directly to investors via at least one platform oriented towards individuals. The fees on the funds range from 0.15% per annum for a FTSE All Share tracker, to 0.55% per annum for an MSCI Emerging Markets tracker. The fees are markedly lower than those charged by other trackers in the market, and the move appears to have sparked more competition. Already, HSBC has sharply cut the fees it charges on its tracker range, taking the TER on its FTSE 100 tracker from 1.14% to 0.27% and making similar cuts on six other index funds. The move is great for investors as it gives them a selection of truly low-cost trackers to use as portfolio building blocks.
Total Fund Classes Eliminated |
Year |
Fund classes liquidated |
Fund classes merged |
|---|---|---|---|
| *3821 |
*2009 |
*2629 |
*1192 |
| 5223 |
2008 |
3476 |
1747 |
| 3442 |
2007 |
2516 |
926 |
| 1565 |
2006 |
1283 |
282 |
|
Page 1 of 6 - Go to page 1 , 2 , 3 , 4 , 5 , 6
