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Over €80bn languishing in sub-scale investment funds

  • By Neil Martin
  • News

European asset managers are leaving open a large number of funds, which are lying dormant and delivering poor investor outcomes.

So says a new report from Morningstar.

The ‘Orphaned Funds’ report analysed 15,339 funds across Europe with a five year track record. Isolating those with assets under €100m and net inflows/outflows of €10m, or less, in each of the five calendar years to the end of 2017, the study identified 3,751 orphaned funds.

These have over €80bn in assets and are often disadvantaging investors from both a cost and performance perspective.

Key report findings:

  • France has over a quarter of the orphaned funds in Europe. French funds are the biggest laggards with 1,036 orphaned funds, followed by Luxembourg (762), and Germany (394). The UK has 194;
  • fund managers of all sizes are culpable. The problem is not confined to small asset managers, with large names such as Amundi, Allianz Global Investors, and BNP Paribas topping the list;
  • majority of these funds are underperforming. Nearly 80% of orphaned funds are neutral or negative rated (according to Morningstar Quantitative Ratings);
  • these funds are very expensive. The median ongoing charge for an orphaned fund is 1.71%, with the median charge for a negative rated orphaned funds at a huge 2.18%;
  • the funds are being left open for too long. The median existence of an orphaned fund is 12.5 years, despite having just a median fund size of €16.6m.

Across UK domiciled funds, over €4.8bn (£4.2bn) of retail investor money sits in orphaned funds.

Scottish Widows is the group with the most orphaned funds (eight), while Neptune Investment Management manages three funds with under €11.5 million (£10m) in each: Neptune Global Smaller Companies, Neptune Global Income and Neptune Quarterly Income (which in fact is going to be merged into another fund on 1 April 2019). The most highly represented IA sectors containing orphaned funds are Flexible Investment (25), Mixed Investment 40-85% shares (19) and UK All Companies (16).

Jonathan Miller, Director, Manager Research, UK at Morningstar, said: “The proliferation of investment funds in recent years has created significant challenges for investors as the sheer choice can be daunting. While investors need to make sure they are using tools and analysis to assess their investments, the onus is also on the asset management industry to provide offerings that are fit for purpose. However, there are currently far too many funds available to UK and European investors that are laced with high fees, are sub-optimal and delivering poor investor outcomes.

“Client suitability is a key part of MiFID II but, since its implementation in January 2018, there is unfortunately little evidence that orphaned funds are being weeded out. It remains to be seen if MiFID II can be the driver that brings the issues of orphaned funds to the fore by regulators. It is evident that investor outcomes are being affected, and this concern should get the wider attention it deserves.”

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