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Fall in fund closures backs up FCA competition claims

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Figures on the number of new fund launches compared with closures appear to support FCA claims that there are barriers of entry and a lack of competition in the asset management sector.

The number of new funds launched in the UK has held steady over the past five years, but far fewer have been closed and that number is falling rapidly, a Money Marketing analysis of Morningstar and Investment Association data shows.

New funds launched in 2016 numbered 157, against 158 in 2015 and 147 in 2014.

Only three of the 2016 launches were passive funds. There were none in 2015 and nine in 2014.

A total of 622 UK-domiciled funds have been launched since 2012.

However, only 62 funds were closed in 2016, compared with 104 in 2015 and 123 in 2014.

Most closures were in the IA Overseas Sector with 11 closures in 2016 and a total of 89 in the sector since 2012.

Six funds were closed in the IA Protected sector, which includes funds aiming to return a set amount of capital back to the investor, in a similar way to money market funds.

Four funds were closed in the UK All Companies sector in 2016. In total, 34 funds were closed in that sector since 2012.

A lot of the launches in the past five years were in the multi-asset space, while last year, there were a number of short duration launches in the UK Corporate Bond sector (10) as a result of the lower interest rate risk in this space.

Competition fears

The FCA found in its interim report on the asset management sector that existing firms have an advantage when launching new funds, as they have more capital to cover initial costs.

In contrast, it says “there may be barriers to new asset managers” as they would likely be unable to raise enough money or leverage the performance track record of other funds to create viable new funds.

Stonefish Consulting managing director Chris Sier argues the barriers to entry are “a market failure,”  and that “new” funds were often reworked versions of existing ones.

He says: “There are barriers to opening a new fund but what we see is that new funds are opening all the time, there is information asymmetry and anti-competitiveness. There is a huge variety of funds out there, which can be very similar or the same fund and often the information published is not the information you need.

“These funds launches are actually not new, they are old funds that have been merged, bundled up, changed the name, unit price or structure so the market failure is true on all these fronts.”

Market fragmentation

AJ Bell head of fund selection Ryan Hughes says he is “surprised but not surprised” at the lower number of closures because anecdotally “it didn’t feel like there’s been a huge amount of closures” last year.

He says: “It is economic for people to keep small funds open and also we’ve got a continually growing fund universe so we are giving investors more and more choice when actually there’s many products out there that aren’t delivering so the problem is getting bigger, not smaller, and that is a concern.

“We are making the job for advisers harder by having an expanding fund universe, and that is only looking at UK funds, not offshore.”

Data reveals Smith&Williamson launched the most funds in 2016 (12), followed by Bestinvest (11), L&G (7) and Vanguard and Columbia Threadneedle (both 6).

Aberdeen Asset Management launched five funds in 2016.

Hughes argues the fund market is becoming increasingly “fragmented” by smaller players launching new funds instead of “the world-known names”.

He says the regulator wants to make sure products do “what they are going to do” and are priced accordingly which should lead to some closures and merges.

Hughes says: “What the FCA really means is that it is hard for people to get big because you see new entrants coming to the market but what you are not seeing is them getting scale. That to me is the real challenge.

“Big fund groups get bigger, people are not prepared to back smaller funds from less well-known houses as they were historically.”

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  1. Perhaps too cynical, but fund performance has been generally good over the last 3 – 5 years so less reason for fund managers to want to have a “fresh start” on their performance comparators? Hence less closures and less openers compared to a few years ago when negative growth years were spoiling the marketing pitch!

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