What’s causing the decline in UK investment fund launches?

The number of actively managed funds launched in the UK is dropping, fast.

While the number of passive funds, which track indexes, has been fairly consistent recently, the number of active ones has almost halved in the last five years, from 146 in 2018 to just 79 last year.

What’s worse, only 32 have been launched this year, according to data to 18 September from Morningstar Direct.

City A.M. has heard of at least two funds that tried and failed to launch in recent months, mainly due to lack of investor interest.

Ben Yearsley, director of Fairview Investing, said there was a “very simple answer” behind the decline in funds: “There are very few people who buy new launches today”.

“As the industry has consolidated and those that are willing to invest in new and small funds has shrunk,” he said.

Big mergers like between Rathbones and Investec’s wealth arm have left larger financial advisers that don’t want to buy funds worth less than £100m, and don’t want to own more than around 20 per cent of that fund

Meanwhile, investor platforms like Hargreaves Lansdown have moved away from backing new and small funds, Yearsley said.

Fund launch fixes

Given the increasing regulatory focus on the value of funds and the worsening cost-of-living, the slowdown in new launches maybe isn’t so surprising.

“Investor psychology pulls us back to the ‘tried and tested’ in uncertain times, and reigns in more return-seeking animal spirits,” said Edward Allen, private client investment director at Tyndall Investment Management.

“Many, if not most, fund launches will be aimed at an investment niche where the manager has specialist knowledge and an edge, and if the instinct to seek higher returns is dulled, it follows that new funds will struggle to find seed capital.”

Other issues for asset managers attempting a launch have been increased regulatory scrutiny, as well as a focus on the high fees that actively managed vehicles often command.

“Our European Active/Passive Barometer report consistently shows that active managers have lagged their passive counterparts over the long term,” said Monika Calay, director of manager research at Morningstar.

“This has driven a shift, with outflows from active funds and inflows into passive vehicles, creating a tougher environment for active managers to win new business.”

Nick Wood, head of fund research at wealth manager at Quilter Cheviot, said a key new dynamic has been the boom and bust of thematic funds, which focused on things like ESG and sustainability.

Now, there is “clearly less demand” for these types of funds, along with others that focused on areas like the ‘metaverse’.

This decline in funds is a problem for investors, as recently launched smaller funds often get periods of excess returns as they’re easier to manage, analysts told City A.M.

“I don’t see the situation changing easily with more and more consolidation going on, the problem will only get worse,” said Yearsley.

Wood disagreed, arguing that the trend in fund launches was cyclical, and should eventually start to bounce back once demand for investment re-emerges.

However, while many City sources were negative on the dearth of fund launches, others saw the positive side, arguing it was good for both consumers and fund buyers.

“We believe the decline in new fund launches benefits both consumers and fund buyers. There are already too many funds to pick from, and any new offerings should be meaningfully differentiated from what already exists,” said Darius McDermott, managing director of Fundcalibre.