Do we really need more fund launches?
The start of year has already seen around a dozen fund launches, making it seem as if 2012 is set to outpace 2011 with new products. But as ever with new funds, the question becomes, are they really needed or are they marketing-led so fund groups have something to sell?
In the opening three weeks of the new year, there have been announcements or indications about three emerging markets-oriented fund launches, two new absolute return portfolios, three income funds and several specialist portfolios, from global macro and smaller companies to financial bonds and commodities.
Across all IMA fund sectors, there are already some 3,000 funds, according to FE Analytics, 151 of which do not have a one-year track record and 318 do not have a track record for 2010. Cynicism about marketing pushes aside, some could argue that fund launches address changing opportunities in investment markets. There are new ideas and strategies as well as the evolution of markets themselves.
Jai Jacob, manager of Lazards’ new emerging markets allocation fund, points out the number of constituents in the MSCI emerging markets index has grown from 1,315 in 2002 to more than 2,770 today. In 1988, there were just 10 countries represented in the index, today there are 21. Investments used to concentrate solely on equities while now there is a growing trend towards emerging market debt portfolios, which themselves are evolving from solely sovereign debt vehicles to include more corporate bonds as the issuance increases. Things have changed. These markets have matured and so the opportunities that can be accessed have grown.
This evolution argument can also be used with foreign income portfolios. Just a few years ago, the UK overwhelmingly dominated the equity income space. However, worries over the UK’s concentrated market have grown while yields in many other markets have risen, paving the way for opportunities elsewhere. Such has been the drive in this area that the IMA has formed a separate category for these funds, global income, but even that does not account for the number of Asian, European, Japan and US income funds that exist.
The phenomenal growth in absolute return mandates is another example of funds that previously were not accessible to retail investors. Changing regulations as well as the investing environment have made these vehicles viable in a way they could not have been 10 years ago. As such, are launches in this sector marketing-led or is there not a substantive reason for the influx of products in this space?
AR funds may have started with good intentions, offering investors a new type of investment strategy. However, as groups saw the strong flow of assets in this direction, it could be argued there has been a large number of me-too product launches. As has often been said, not everyone running an absolute return strategy has the expertise to do so.
There are now 75 funds in the AR sector, three have launched so far this year while nine were introduced in 2011 and 18 in 2010. Of the 23 that have been around for at least three years, four have been consistently third or fourth quartile. Over one year to the end of December, 25 have posted positive gains, the whole point of absolute return, while 39 are in negative territory.
Jacob makes a similar argument with emerging market investments. He notes developments in emerging markets, leading to some 10,000 different instruments in which to invest, requires more specialist knowledge to find value. It would seem performance would back up that assertion. There are 56 funds in the IMA’s GEM sector and 22 have a decade-long track record. Of that 22, nine are consistently ranked either third or fourth quartile over 10, five and three years.
Within the global income category, track records are short but half of the six that have been around for five years have never ranked higher than second quartile over the six months, one year, three and five years to 31 December 2011, FE Analytics shows.
Performance aside, the rationale for new entrants in these evolving areas can still be understood. However, if keeping pace with changing markets and opportunities were really the motivation behind most fund launches, shouldn’t the majority of the new funds be targeting these three areas? Instead, just three portfolios in the global income sector were launched in 2011, only two new emerging markets funds were listed in the GEM sector while 11 were added to the absolute fund grouping - out of more than 150 launches last year. This compares with three additions made in the Europe ex UK sector last year, eight in UK all companies and five in the UK equity income sector.
Fund launches give groups a hook with investors and represent a way to draw in assets. With dwindling income from fees, it is understandable. According to a CBI/PwC report on the financial sector, the investment industry saw a “substantive” fall in fee, commission and premium income last year while interest, investment and trading income was down. Although costs came down slightly, it was not by as much as business volumes fell. While groups said they intended to spend more this year on IT systems, they also indicated increased marketing budgets. In addition, “there was unanimity that the level of demand over the coming year could limit firms’ ability to increase their level of business,” the report stated.
With more than 3,000 onshore funds alone, shouldn’t fund groups concentrate on improving the products they already have rather than continually introducing new ones? If product launches are simply indicative of the way markets have changed, targeting assets and strategies that a few years ago would not have existed, what funds should go to make way for the new ones? Surely some of the smaller funds that exist could be merged away. For example, in traditional sectors such as global, there are 48 portfolios under £20m in size while in UK all companies, there are 51. If fees and income are under pressure, scrapping unviable, uneconomical or under-performing mandates should be a more prudent solution than introducing more products.