Saturated funds industry needs clean up

The funds management industry needs an overhaul of small, inactive and low performing products to improve efficiency and customer service, according to two key research figures.

Morningstar managing director and publisher Graham Rich and Assirt chief executive officer Krystyna Weston faced a packed room of Investment and Financial Services Association (IFSA) conference delegates in Brisbane yesterday to share views on the topic “bad products we should kill”.

Rich identified the huge level of growth in funds, 290 per cent in the past ten years, and the current state of the industry’s swollen supply. Taking a marketing perspective he said it was not consumer demand for choice creating the 5000 Australian domiciled funds on the market, but over supply from fund managers.

“People do not want choice, people want what they want. But groups have given them what they want, creating choice.”

Rich’s idea of bad procucts to kill were small funds with less than $50 million and at least five years old with poor performance, measured by a Morningstar return rating of less than six. He described these funds as the “ugly dog contenders.”

“I would suggest there is something wrong with continuing to offer funds that fit these characteristics,” he said.

“The industry has the challenge to deal with these products and get rid of inefficient funds hurting investors.”

Weston also identified “neglected and un-loved” products as those that should be closed down, but said the reality of a solution was not that simple.

Legislative issues, the costs involved with closing down funds, and investors who do not respond to institution letters all hinder the task of getting rid of bad products.

“We know the challenge, and need to find a solution,” she said.

Mislabelled products were also identified by Weston as those that should be killed, such as imputation funds with only 20 per cent imputation rather than the 60 per cent Assirt believes the funds should have, and cash products that are more like enhanced cash funds.

Funds that were not outperforming the benchmark and charged investors management fees also made Weston’s hit list.

“Investors pay fees for outperformance, if managers can’t deliver this those products should be got rid of,” she said.