The investment landscape has changed dramatically over the past decade and the mutual fund industry has changed with it
Questions are often asked on whether the retail sector is a leader or a follower with regard to investor requirements and the answer is typically a bit of both.
The significant influx of property offerings springs to mind as a response to increased investor demand in contrast to the more proactive growth and evolution of the absolute return sector, incorporating full usage of updated Ucits powers.
The retail sector on its own, and for many the mutual fund universe, in effect represents the available investment universe. Looking across the industry, both onshore and off (in terms of jurisdiction but available within the UK), the universe has grown by more than 1,000 funds in little more than six years and now stands at more than 5,500. Yet dig beneath the headline numbers and some interesting patterns can be seen.
Firstly, the rate of growth. In terms of simple availability and choice, you have to look back a number of years to see the growth and the almost exponential rate that the industry saw has not been maintained. In 2006, for example, the fund universe grew by more than 10 per cent.
This level of growth seen in the early to mid part of the past decade was clearly unsustainable and commentary at the time challenged the industry over what was seen as a very sales-led environment. The shake out came with the credit crisis of 2007/08 and the repercussions are still clearly evident today. The growth rate turned negative for the first time in recent memory, with 2009 recording a contraction of more than 2.5 per cent within the available fund universe and a mild downward trajectory has been maintained.
In addition to the above, or I should say in conjunction with, there has been a clear drop in the level of sub-scale funds while the larger funds are growing in dominance.
Taking £10m as an arbitrary sub-scale level, the number of funds as a proportion of the total universe has dropped from almost 25 per cent to fast approaching 15 per cent over the course of the past six-and-a-half years. In the same time period, funds above £250m in size have seen an almost exact reversal to this and are rapidly approaching a quarter of the total universe by fund count.
The final ripple relates to share classes. In mid 2005, there was an average of 2.75 share classes per fund across the entire universe. This has grown steadily to a current level of in excess of four separate share classes per fund in issue.
The conclusions from this simple overview of a changing investment universe make perfect sense. The industry has shifted to a phase of rationalisation, closing or merging smaller, unsustainable funds, stripping back fund ranges and with it stripping out cost from the P&L.