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August 17, 2017

The Future of Fund Selection Remains Bright

by Jake Moeller.

Is the fund research and selection industry–as many of the commentariat would have you believe–in a state of existential crisis? The beam of light that initially illuminated the U.K. financial services value-chain under RDR reforms has focused more intensely, with recent high-profile regulatory initiatives, 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 increasingly dynamic Augean fund stable.

A buoyant funds industry is supportive

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. Lipper Q2 data reveal that assets under management in Europe stood at €10 trillion at the end of June 2017.

Exhibit 1. AUM growth of Pan-European Funds Market by Product Type (€ Million)

Source: Thomson Reuters Lipper

Source: Lipper

The U.K. alone had over a tenth of those assets. Pan-European fund inflows over the year-to-date period totalled €363 billion. There were some 12,000 cross-border funds a U.K. investor could potentially access. Who wouldn’t need help sorting out the wheat from all that chaff?

Who will police “closet trackers” and other scandals?

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 fund managers really believe they can pull the wool over the eyes of any halfway decent fund selector on active share and tracking error?

The rise of passives equals opportunity, not threat.

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 €578 billion at the end of June 2017, up 12% from the end of 2016.

Exhibit 2. Pan-European Estimated Net Flows by Product Category (€ Million)


Source: Lipper

Far from being a set-and-forget investment, there is much to consider in regard to ETFs. Scalability, securities lending policies, tracking error, cost and in an increasingly saturated market, corporate takeovers, are all complex moving parts of an investment many mistakenly see as simple and transparent.

The response of fund selectors is proactive

At the recent annual Lipper European Fund Selectors’ Forum in London, I was pleased to witness the response of some of the industry’s most high-profile fund selectors to current challenges: 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 fund selectors provide should be apparent. However, just as 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.

Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

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.

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