The group apparently noticed that 99 per cent of revenues come from 50 per cent of its funds and came to the conclusion it might have a few too many offerings. By its own count, it has more than 3,000 at present, which does seem rather a lot.
There will always be some necessary duplication as fund companies are forced to launch different legal versions of essentially the same fund to comply with regulatory regimes in markets around the world. Nevertheless, the move points to an ongoing issue within asset management in general, and one that afflicts Europe in particular – an issue that hurts one of the primary benefits of using funds – a lack of scale.
Indeed, at our last review in March, Morningstar found 60 per cent of European-domiciled funds (excluding money market funds) held less than ?50m (£43.1m) in assets, compared with 29 per cent in the US market. Conversely, 19 per cent of US-domiciled funds held north of €1bn in assets, compared with just 2.8 per cent in Europe.
Part of the issue is that too many groups continue to try to be all things to all investors. The problems with this are threefold. First, it is likely to rapidly tax the capabilities of groups to achieve or maintain excellence across an increasingly disparate fund range.
Second, such launches often amplify short-termism, as assets tend to flow to areas that have had near-term success. We believe groups should be discouraging this rather than encouraging it.
Finally, investors are left with a fund universe increasingly populated with ‘me-too’ offerings of little quality.
Another issue behind the lack of scale has to do with the absence of a true common market and regulatory regime for funds in Europe.
Local-level differences in tax treatment and regulatory requirements too often lead to needlessly high levels of duplication and added costs for fund investors.
It is also the case that a desire to offer locally focused funds in some asset classes leads to fragmentation – few investors outside a given market will invest much in equity funds dedicated to that market, for example. Setting these aside, however, broader spectrum offerings often appear to be hindered from achieving a reasonable scale.
The effect on investors is pernicious. Aside from the damage done by taking a short-term approach to building assets under management, one of the key benefits of investing in a fund is achieving a reasonable level of diversification at low cost. But a lack of size keeps costs higher, as economies of scale are necessarily smaller.
In the face of this, I see three remedies. First, fund companies should rationalise their present line-ups to refocus on areas of strength –there are simply too many funds chasing the available asset pool.
They should also focus on offering broader, less volatile vehicles that make good long-term investments – the trend towards mixed-asset funds and solutions in the UK is a step in the right direction.
Finally, regulators need to step up and deliver on the promise of a common market for funds that allows worthwhile offerings to build scale and keep costs down. The first two are easily within the grasp of fund companies.
Christopher Traulsen is director of European fund research at Morningstar
