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Mifid II will expose complacent funds

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“We think the industry developments brought about by MiFID II will be good for investors. High fund fees and value for money will be brought to the forefront of attention, and asset managers will no longer be able to ignore the continued existence of funds that have lost their way,” says Jackie Beard, Director of Manager Research Services for Morningstar in Europe.

Beard believes there is “is a degree of complacency among some asset managers” as they continue to prolong “the life of funds that are no longer relevant for today’s investors.” Arguably, the same can be said of investors who invest in these funds of course.

Fund clean-up required

But Mifid II could finally trigger a clean-up of such funds, as the directive requires investment firms to conduct regular fund reviews.

“The number of fund share classes available for sale in Europe has grown at an exponential rate in the last decade. We hope that MiFID II product review requirements, which must be proved through an audit trail, will eventually prompt action to be taken on some of the long-established funds that have lost their way. These still exist because the assets are sticky, in spite of indifferent management,” says Beard.

“Asset managers will need to ensure that their products function as intended to avoid any potentially detrimental consequences for investors,” she adds. “As well as a regular review, they will be obliged to review their products when they become aware of an event that could materially affect the potential risk to investors.”

It’s all great Mifid II is shoring up investor protection, of course. However, it will add to fund management costs, which will likely lead to higher management charges. Moreover, the review requirements will only apply to actively managed funds, although index trackers are arguably even riskier.

Moreover, any self-respecting fund selector surely won’t need help from regulators. They will have identified these complacent funds long before a product review required under Mifid II reveals their faults, right? Well, fund selectors are human and they all make mistakes. But if Mifid II can prevent some of those, and protect non-professional investors who are more likely to make them, all the better.

Part of the Bonhill Group.