Morningstar has called for greater transparency in the securities lending industry after conducting research into the practices of 10 European providers of physical replication exchange traded funds. Morningstar said that improvement was necessary in terms of disclosure of counterparties’ identities which remains “subject to much resistance”. Under the latest guidelines on ETFs and other UCITS-compliant funds provided by the European Securities & Markets Authority (Esma), a fund’s annual report will need to provide a list of borrowers. This should go some way to satisfying calls for greater transparency in this area.

Earlier this month Esma published ETFs and Other UCITS Issues guidelines. As reported by Hedgeweek at the time, the guidelines call for fund managers to inform investors about the securities lending practices, and return all net revenues (that is, ‘profits’) to the fund. Morningstar has found in its research that the portion of securities lending revenues returned to a fund ranges from 45 to 70 per cent of gross revenue. The new guidelines might cause some fund providers to review their revenue sharing arrangements and re-evaluate whether the fees currently charged are reasonable and justified.

Hortense Bioy, Morningstar senior European ETF analyst, said: “As we expected, some providers have already taken action to return more income to investors, while others have said they won’t pass on any more income because they consider the fees they currently retain to be fair and reasonable.” Bioy added that Morningstar hoped the additional transparency requirements would help drive down the costs associated with securities lending, providing “enhanced returns to investors”.      

Wealth managers have given out mixed signals to the proposals by the Financial Services Authority’s plans to ban the promotion of unregulated collective investment schemes (Ucis) to retail investors reported Citywire Global this week. Under the new proposals, firms will not be allowed to market Ucis to ordinary retail customers even in the context of financial advice. Sophisticated investors and HNW individuals will be exempt from the restrictions.

Some argue that this could cause managers to pull back from operating in such areas, potentially to the detriment to their clients. One anonymous source was quoted as saying: “We will be unlikely to use Ucis, unless we see something that is particularly special or different going forward. We will be compromising what is best for the client because it is too big a headache to recommend them.”

Defending and welcoming the FSA’s proposals, Haig Bathgate, who heads up investment strategy and research processes at Turcan Connell, was quoted as saying: “A lot of these things are pretty complex. If we use them for sophisticated high net worth investors we spend a long time explaining the relative characteristics of the investment. I think it is a good initiative and should stop the abuse that has been happening.”  

In other news, EFG Asset Management has launched an open-ended equity fund to invest in up to 50 Chinese and Hong Kong stocks across all capitalisations reported International Adviser this week. EFG Asset Management is the asset management arm of EFG International. Its new fund – New Capital China Equity Fund – is to be managed by Mansfield Mok, a Hong Kong-based China equity fund manager. Prior to joining EFGAM Mok co-managed the USD1.5billion GAM Star China Equity Fund, which outperformed the MSCI China Index by over 70 per cent during Mok’s five years at the helm, according to Bloomberg data.
 
The UCITS IV-compliant fund is domiciled in Dublin and becomes the ninth sub-fund in the firm’s New Capital mutual fund range. “China is widely expected to become the leading economic superpower over the next five to 10 years. In order to capitalise on its anticipated growth, it is vital to be able to identify the best companies,” commented Mok.
 
Added Moz Afzal, CIO of EFGAM: “By combining good long-term macro-economic fundamentals with Mansfield’s expertise in identifying great companies on a timely basis, we believe this is an opportune time to launch a China equity fund, which will ultimately be a good source of value for our clients.”