Is the fund research and selection industry, as some in the industry would have it, in a state of existential crisis? Thanks to a series of high-profile regulatory initiatives, the beam of light that initially illuminated the UK financial services value chain as part of the RDR reforms has started shining more intensely on the role of fund selectors.
I contend that the future of fund selection is assured and as important as ever. Far from being threatened by robo-advice, passive funds or regulatory scrutiny, fund selectors today are well placed to secure themselves as valued ‘cleaners’ of the ever-growing ‘Augean fund stables’.
As a starting point, we should consider the funds industry more widely. Far from being in a state of atrophy, the pan-European funds market is in robust health.
Thomson Reuters Lipper data for the second quarter reveals that assets under management in Europe stood at €10trn (£9trn) at the end of June 2017. The UK alone had more than a 10th of those assets. Pan-European fund inflows over the year-to-date period totalled €363bn. There were 12,000 cross-border funds a UK investor could potentially access. Who wouldn’t need help sorting out the wheat from all that chaff?
I do not share the somewhat sceptical views of many active fund critics. Despite what many see as a relapse to old ways in the form of closet tracking, I believe most fund manager groups genuinely hold their clients’ best interests at heart.
Furthermore, which managers really believe they can pull the wool over the eyes of any halfway decent fund selector when it comes to metrics such as active share and tracking error?
The rise of passive funds and ETFs is also seen by most fund researchers as an opportunity rather than a threat.
Assets held by the European ETF industry stood at €578bn at the end of June 2017, up 12 per cent from the end of 2016. Far from being a set-and-forget investment, there is much to consider in regard to ETFs. Scalability, securities lending policies, tracking error and cost are all complex moving parts of an investment many mistakenly see as simple and transparent.
At the recent annual Lipper Fund Selectors’ Forum in London, I was pleased to witness the response of some of the industry’s most high-profile selectors to current challenges. They suggested that technology is not disruptive: it allows more time for deeper qualitative research.
Regulation is welcome and, to the extent that fund selection isn’t a homogeneous industry, poses more difficulty for regulators themselves. An increasing passive market requires the attention of fund selectors to reveal its particular vagaries. Fund selectors are now prepared to provide evidence of the value they add to their unique client bases.
For end investors, the critical layer of additional due diligence that fund selectors provide should be apparent. However, like a repentant gambler who never quite shakes off the ignominy of past misdeeds, the mutual funds industry too is a major beneficiary of their ongoing vigilance.
Jake Moeller is head of UK and Ireland research at Thomson Reuters Lipper
