Why Fund Closures are No Bad Thing

Of the 2,500 UK-domiciled funds that existed at the start of 2008, 60% have been closed - and 2,000 have been launched

Jonathan Miller 21 August, 2018 | 8:27AM
Facebook Twitter LinkedIn

shop closed sign fund closure asset management fund merger fund launch

Of the 2,500 UK-domiciled funds that existed at the start of 2008, a massive 1,500 have been closed over the past 10 years. Over the same period, nearly 2,000 funds came to market, meaning a net addition of 440 offerings.

Looking at this another way, just 40% of funds that existed at the start of the period are still around today. Those disappearing have either been liquidated or merged into other funds.

At the start of this year there were just shy of 3,000 UK-domiciled funds. Add those funds domiciled in areas such as Luxembourg and Dublin that can be purchased by UK investors and the number doubles. While the majority of the Lux and Dublin listed funds are not available on retail platforms, investors can be forgiven for feeling overwhelmed with choice.

Keeping track of investments can be tricky when you consider the extent to which funds come and go. Part of the job of Morningstar analysts is to identify the ideas and funds that have longevity and can serve investors well over the long term.

It will come as no surprise that 2009 was the year with the most fund closures; in the depths of the financial crisis, 200 funds disappeared that year. Following the stock market crash and subsequent material outflows, asset managers will have questioned the viability of their offerings. But as the recovery took hold, 2010 was the second biggest calendar year for fund launches.

Fund Closures No Bad Thing

It’s a good thing when attrition weeds out underperforming and expensive funds, but there’s still more to be done. Being consistently in the bottom echelons of a sector can put the spotlight on fund groups and this sort of pressure helps explain why some throw in the towel.

But with more fund launches than closures over the last decade, it highlights how creating new products can form part of a group’s marketing machine.

Use of the word ‘products’ is intentional in this description. It reflects where we see trendy launches, niche offerings, or a sense of chasing the next hot thing. We’re not keen on this approach.

Granted, the investment industry has evolved over time and developments in the passive space have seen a great number of cheap funds come to market across sectors and asset classes. This low-cost revolution has been of benefit to investors. But the rate of launches amounts to four new funds being launched every working week – that’s simply too many.

In our qualitative assessment of fund managers, which determine the Morningstar Analyst Rating, one of the pillars we asset is the Parent; the asset management group itself. The extent of churn in a group’s fund range and their stewardship of investor capital form part of our overall Rating.

Ultimately, investors should monitor any communication from fund groups or platforms to keep abreast of any change taking place. These shouldn’t be treated as junk mail or spam. When an existing investment is being merged into another, does the new fund match the original objectives or is it different? There’s a decision to be made and investors should act. Walking away to invest in a different fund is always an option.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Jonathan Miller  is Director of Manager Research, Morningstar UK

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures