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October 2, 2017

Monday Morning Memo: A call for more transparency in the European mutual funds industry

by Detlef Glow.

Even though investors and regulators want to know as many details as possible about the holdings of the mutual funds they own, the fund industry—especially in Europe—tries to hold back as much information as possible. From my point of view, it is in the best interest of investors to see the full holdings of funds and not only the allocation at the level of sectors and regions. Investors want to be able to estimate the risk/return profile of the holdings in their portfolios. I do not say this very often, but when it comes to regulatory policies, the interest by regulators in the full holdings—as expressed by the launch of the SOLVENCY II regulation—is understandable. Even though mutual funds are in some regard far more transparent than other investment vehicles, they are still not transparent enough from my perspective. I don’t understand why the industry isn’t using a high level of transparency as a competitive advantage over other long-term investment products such as life insurance or other pension products, which are more or less black boxes.

Don’t get me wrong here. Not all the fund industry tries to sell black boxes to investors. Some asset managers are quite progressive about transparency and publish the full holdings of their funds day by day on their web pages. Others do so on a monthly basis, or at least they deliver the holdings data very frequently to data vendors such as Lipper, to have their holdings published in fund analysis tools.

In contrast, a number of asset managers disclose the full holdings of their funds to the public only when they publish their annual and semi-annual reports. Even though these managers claim that the holdings of their funds are the outcome of their research and therefore are their intellectual property (which needs to be protected from being copied by their competitors), they do publish their full holdings more frequently to large semi-institutional investors and of course to institutions that need to look at the full holdings as per regulations, such as insurance companies under the SOLVENCY II regulation. It is hard for me to accept that smaller investors are treated differently than large investors when it comes to disclosure of the full holdings of a mutual fund.

With regard to this, it is interesting to follow the current discussion around active ETFs, since market participants claim that the lack of “real” actively managed ETFs in Europe is caused by the need to deliver the full holdings to the respective liquidity providers, i.e., to market makers and authorized participants (APs) of the fund. I am quite curious to see where this discussion ends, since some ETF promoters have claimed in the past that the “T” in ETF stands for transparency. This might end in a clash of cultures in the ETF industry. But when it comes to investors, I am fairly sure I know which part of the industry will win the race for assets.

Since the pressure on asset managers to publish the full holdings of their funds is increasing, I am fairly sure the fund industry will at some point agree to this level of transparency. Otherwise, investors may no longer invest in the funds, or regulators will force the industry to publish the holdings. Even the smallest shareholder has the right to know what he is holding in his portfolio.

The views expressed are the views of the author, not necessarily those of Refinitiv.

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