Holding onto the future

19 April 2018
By Tiziano Giannotti

By Fiona Maciver

Fund-industry professionals and investors alike are often guilty of looking for short-term gains instead of long-term investment returns. The tide, though, may be changing as the cost of acquiring customers increases, and fund managers need to work harder to retain business and adapt to changing investor tastes. In our annual review of fundholding periods, we look at where things currently stand, and the markets and channels that exhibit the highest persistency levels.

AVERAGE FUND-HOLDING PERIODS

Fund Buyer Focus data based on interviews with third party fund selectors suggest that their average holding periods have trended slightly higher in the last five years. However, over the latest 12-month period, they remained relatively static at pan-European level, with a typical holding period of three years. Persistency rates inevitably vary from country to country and channel to channel. At channel level, insurance companies continued to report the longest holding periods: approximately seven years. Fund-of-funds managers are at the lower end of the scale with an average holding period of 2.5 years – they are more active in switching in and out of underlying funds to accommodate portfolio adjustments and rectify performance issues. The chart on this page highlights the differences in professional fund-buyer behaviour at market level. Italian fund-holding periods stand well below the European average, largely driven by advisory and discretionary portfolio managers there, who typically hold funds for less than two years. At the opposite end of the spectrum are Germany and the UK. The latter may be characterised by one of the longest average holding periods in Europe but, according to local trade body The Investment Association (IA), this has been subject to long-term decline as a result of changes in retail-investor behaviour. The IA’s research has found that the average holding period has fallen from eight to four years over the last two decades. It sees the decline as being linked to increased transparency, new technology, greater availability of information, additional engagement with end-investors and, interestingly, an aftershock from the Retail Distribution Review (RDR). RDR has resulted in greater concentration of fund selection, as a high proportion of British IFAs are outsourcing this to a small number of gatekeepers. A side-effect of this situation is the occurrence of bulk switches and higher-volume redemptions to/from a relatively low number of funds when asset-allocation changes are made.

What might the future hold?

We don’t anticipate any major shifts in persistency over the next 12 months although market conditions and fund performance will undoubtedly exert some influence on the outcome. If the current market volatility continues, a lot more switching and redemptions activity can be expected, particularly affecting those funds used as portfolio building blocks (as opposed to one-stop-shop solutions funds). However, this could also spread to multi-asset funds if they underperform. In theory, risk-managed solutions should encourage longer holding periods, but if they don’t deliver what they say on the tin, retail investors will ultimately retreat