Stock lending is leaving investors short changed
Fund managers are pocketing millions, but taking little risk, in the secretive practice
Sunday 05 August 2012
Fund managers are pocketing millions of pounds in extra revenue while exposing their investors to potential risk, insiders have told The Independent on Sunday.
The highly secretive practice of stock lending – where a manager will loan a fund's shares out to a third party in return for a fee – is believed to bring millions into fund-management firms. But it seems UK fund managers are routinely pocketing a huge proportion of these revenues – sometimes as high as 40 per cent – leaving investors short changed.
"A lot of the managers are keeping 30 to 40 per cent of incomes they raise from loaning out stocks rather than passing it in full to the fund," says Alan Miller, the founder of SCM Private. "If there are any losses from the transaction, they are normally borne by the fund, therefore the investors. So it's fundamentally wrong. If investors have 100 per cent of the risk, then they should receive 100 per cent of the return."
In addition, Mr Miller says that the overwhelming majority of investors have no idea of the potential risks and rewards (to the fund-management group) of stock lending.
"A lot of investors have never been made aware their funds are doing this," says Mr Miller. "There's nothing wrong with it in itself, but investors have a right to know this is happening and how it works."
Many high-profile fund managers indulge in stock lending in return for some income, giving a portion back to the fund and keeping a large cut of it for themselves. Defenders of the practice argue that it is much like letting a house for a home-owner, and that the letting agent should be able to not only cover their costs, but keep a portion of the income.
But with the high fees charged by pension and investment funds currently hitting the headlines, the European Securities and Markets Authority is acting.
From February, the ESMA wants all fund managers to repay fees earned from stock lending back into their funds, only deducting their costs.
In addition, Alastair Kellett at Morningstar said the ESMA ruling should mean that fund managers will have to disclose in their prospectuses any fees or expenses gathered through stock lending, revealing how much is being lent out, to whom and how much income is generated, for example.
"This is a win for investors, because until now, you had no idea this was going on," says Mr Kellett.
The rules should eliminate some of the worst excesses in the market and see an uplift in investor returns.
"It's also about transparency – fund groups would benefit from being more upfront with investors," says Ben Seager-Scott at financial advice firm Bestinvest. "The most I've seen lent out at one point is 95 per cent of the stock in a fund."
When stock is lent out, the fund manager puts other stock in its place within the fund, to cover the loan in case something goes wrong.
"But it means what's in the fund isn't what you think is in the fund," adds Mr Seager-Scott.
Emma Dunkley is a reporter at citywire.co.uk
- 1 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 2 Mystery man who gave mum heart-warming note on train 'wanted to put a smile on her face'
- 3 Michelle Obama highlights harsh restrictions faced by Saudi women after meeting King Salman without wearing a headscarf
- 4 Mafia's wall of silence broken: Victim of Cosa Nostra's extortion rackets in its Corleone heartland co-operates with authorities for the first time ever
- 5 Amal Clooney gives excellent answer to fashion question at European Court of Human Rights
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
Louise Mensch says 'F**K YOU' in explosive tweets about David Cameron, Saudi Embassy and the Queen over King Abdullah tributes
iJobs Money & Business
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village