Morningstar Supports New Regulation for European Fund Managers

Terry Flanagan

Morningstar, the fund research company, argued that new regulations will boost the European asset management industry where too many products are manufactured and costs can be very high.

Christopher Traulsen, Morningstar’s director of fund research, Europe, Middle East and Africa, said in the company’s latest bi-monthly magazine that he supported recent and proposed regulation to eliminate the influence of commissions on advisors’ fund selections and to better align portfolio manager bonuses with the interest of investors.

Morningstar said there were 34,350 open-ended funds in Europe with total assets of $8.3 trillion at the end of May. In comparison, at the same time, the US had 8,015 funds with $13.9 trillion in assets.

“In short, there is 4.6 times the number of funds in Europe as there are in the US, but only 60% of the assets,” added Traulsen.

In addition the fragmentation of the European market means that half of European funds have less than $50m in net assets, compared to 24% in the US.

European asset managers create funds to meet short-term demand and close them down if they fail to gather assets. “This makes investing more difficult for the long-term more difficult than it needs to be, stretches the capabilities of asset managers to deliver and reinforces one of the investors’ worst instincts: near-term performance chasing,” said Traulsen.

Between 2008 and 2012, according to Morningstar, 12,918 new funds were launched in Europe while 17,817 funds were closed.

Traulsen said recent regulations should boost the asset management industry in the region, especially by banning the payment of commissions from asset managers to advisors. He added that while the UK was the first to ban commissions, the Netherlands has flowed suit and an EU-wide ban is under consideration.

“Before [the ban], product types that did not pay or paid little commission were rarely used by advisors,” said Traulsen. “These funds, which include index funds, exchange-traded funds, and closed-end funds, are now on a level playing field with the former commission-paying funds.”

In another regulatory change, UCITS V,which could come into effect by the end of 2015, sets rules on manager bonuses. The new rules require incentives to be spread over a long-term period in keeping with the fund, that at least half of a bonus is paid in the shares of the fund being managed and that at least 40% of a bonus is deferred for at least three years.

“These amendments admirably address potential conflicts of interest between variable pay and the interests of fund investors,” added Traulsen. “The European fund universe remains a complex and challenging arena, but real improvements are arriving that should help deliver a better investor experience, and by extension, a healthier, more vibrant asset management industry.”

Featured image via iStock

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