ORPHANS HAVE NO HIDING PLACE

One of the main investment fund research groups (Morningstar) have produced a report which has some fairly bad news for many investors that attempt to DIY their investments or fail to pay attention.

In a nutshell they found many investors are holding what might be described as expensive “Orphan” funds. Morningstar conducted a European wide piece of research into funds with a track record of at least 5 years. There were over 15,000 of them, yet a staggering 25% were “orphaned”. This means that the funds are run but attract relatively little investment – in effect, no longer promoted. They are deemed small in that they hold less than £90m with little to no new money.  As a result, they aren’t really on anyone’s radar. The money going in is generally “insignificant”. Consequently, performance becomes lacklustre to say the least.

You might be forgiven for thinking that being “small” these must be fairly new funds – the truth is that they have typically been running for around 12 years. They also have fairly high charges of typically 2.18%. That is a lot…. and far more than any of our clients pay for investments. This excludes any adviser charges (which is meant to be a European-wide format since 2013).

The short version of the report is that there are too many funds, many of which have very high charges. The longevity of the fund is prolonged by inaction by both investors and the fund managers that “run” the funds. It is hoped that costs and charges disclosure, brought about by European legislation (MIFID2) will help expose and reduce the problem and leaving them with nowhere to hide costs and performance. France currently have the largest number (5x more than the UK) of orphaned funds by quite some margin – c’est la vie?…

The UK didn’t do too badly in terms of the number of orphan funds by number, (194) but this still computes to around £4.2bn in small, expensive funds going pretty much nowhere. That’s a lot of money folks and it really needn’t be this way..