January 2, 2019

New Year Resolutions for the European Fund Management Industry  

by .

As the year goes by, a number of humans start to make plans for the New Year and build up their New Year resolutions. With regard to this tradition, it would be quite interesting to see what the asset management industry would write into their New Year resolutions. Therefore, the following text is rather fiction than fact driven, but I could imagine that the asset management industry would take action on some of the points mentioned below in its New Year resolutions, as the industry does face increasing pressure from regulators and consumer protection groups on some of the topics below.

Avoid index hugging

Even as the majority of funds that claim to be actively managed is doing so, quite a high number of funds have been identified by watchdogs and regulators to be closet index trackers; e.g. delivering an index-like return/risk profile while charging fees for active management. With regard to this, the fund management industry needs to re-sharpen its focus on delivering excess returns (alpha) to convince investors that actively managed funds are a real alternative to ETFs or index funds.

Rethinking fee and expense models

Under pressure from the competition with passive products, the fund industry needs to review the cost structures of its products to identify those products that allow higher fees by the level of outperformance they deliver for investors. The industry needs also to take the general environment into consideration, as especially in the bond sector some funds do have high charges compared to the level of returns that can be achieved in the current market environment.

That said, we already see some big names in the global fund industry who rethink their fee models and launch new fee models to align the interest of the investor with the interest of the asset manager, which could be kind of a blueprint for other managers.

Reduce complexity

Simplifying business models and product ranges can be used to increase profits and help investors find the products that suit them best. Every fund in the product range of an asset manager has fixed costs coming with the legal requirements and operational efforts to run the portfolio. Therefore, a lower number of funds with higher assets under management will help to increase the overall profitability of the respective product range. With regard to this, increasing assets under management in single products can be achieved by merging similar funds into the best performing products.

In addition, a lower number of funds does mean that the respective portfolio managers can concentrate more on the surviving funds as they don’t have to bear so much different restrictions, from slight twists in the investment strategies of the different products, in mind. This may lead, in turn, to wider investment objectives for the remaining funds.

A smaller product range does help investors to find funds that suit them best, as they don’t have to check the investment strategies of a number of funds and, therefore, may welcome these efforts.

In addition, the usage of so-called modern portfolio management techniques should also be reviewed as some of these techniques, mainly securities lending, do not deliver appropriate returns for the investor if one takes all costs and risks into account. These techniques also often need additional operating efforts to be monitored and executed properly.

Increase transparency

It may also be welcomed by investors and regulators when the asset management industry increases the transparency of its funds, as they act as fiduciaries of the investors. Therefore, they should be clear on the investment objectives and strategies of the funds, and also transparent on the portfolio management techniques, such as derivatives trading and securities lending, that are used. This does include the costs and returns in euro/US dollar arising from the use of these techniques. As a result, the asset managers should provide a respective section in the annual report with all income and costs related to the securities lending activities. This report may also indicate the performance impact on the portfolio from the short selling of the lender.

Once again, this text is rather fiction than fact and does cover only a few of the points the author could imagine to be in a New Year resolution of a fund management company. But making some of the adjustments above would help the industry to gain back trust from investors all over the world.

I wish all readers a happy and successful year in 2019.

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This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The views expressed are the views of the author, not necessarily those of Refinitiv.

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