Beware Short Termism Among Fund Houses

The creation and elimination of funds since 2008 suggest that fund houses are treating funds as products to be trialled rather than long-term investments

Christopher J. Traulsen, CFA 30 April, 2013 | 12:08PM
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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.

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.