manager seeks additional income stream for £1.7bn gartmore European select fund
Roger Guy's £1.7bn Gartmore European Select Growth fund has begun lending stock to add extra income to the portfolio.
Stock is usually lent to hedge funds often to short a company, although Gartmore said Guy is not lending the stock to himself to run his long/short European portfolio or any other Gartmore hedge fund. Instead the group uses a custodian to lend the stock and therefore Guy is unaware of the end borrower.
The group is only doing this on its largest unit trust at the moment as it sees the demand for stock as a way in which to provide an additional income stream to the fund. Since the process began just a month ago it is difficult for Gartmore to quantify how much income will be added through lending.
Threadneedle, which lends from all its retail funds, said the income level varies depending on the portfolio but because of their size the percentage impact is negligible.
Typically pension funds and life companies lend stocks, previously only to market makers but more commonly today to hedge funds.
Despite this demand for fees paid to institutions for the loaning stock has gone down.
Investment Week talked to one life company, which did not wish to be named, noting that even though it was a small player in stock lending, it had been making £6m annually just for making stocks available on an exclusive basis. Now this is down to £1m per annum and is neither worth the effort nor the risk for the company to get involved.
Unit trusts can lend stock as part of efficient portfolio management, adding income to a fund to benefit investors. Lending carries a number of advantages to the portfolio, according to Colin Black, director of insured business at the UK arm of Aegon. He said: 'If someone like a market maker wants a stock, I can lend it to them and in return I get security, in the form of assets so that even if I don't get back the stock I have something worth even more. Plus the borrower will pay me a fee for the privilege of the loan ' that's income for the fund, which helps performance.'
If a fund lends £100,000 worth of stock, it gets collateral worth £102,000 for instance so if the counterparty fails and cannot return the stocks, the lender gets the assets to make good the position. Collateral is generally cash or bonds. Black said the lending process can add up to 0.5%pa of the value of the stock being lent through the collateral and the fee.
Another benefit is the lender still gets the stream of dividends from the stock that has been lent, although they do forfeit voting rights, Black explained.
He said the income from lending is a marginal benefit with the most beneficial part of the arrangement being the liquidity it adds to the market.
The FSA has been asked to look into the way in which hedge funds short stocks as some believe this is adding to the volatility in the market. However, Black noted that borrowing and lending stock is a part of efficient markets and if this is restricted then the stock market will become more prone to violent swings.
Retail unit trusts have been looking at stock lending now as investment returns have been marginal and this can help to boost performance, although many investment houses have stayed away as the process can be complex in terms of administration and compliance.
Schroders, Fidelity and Jupiter do not lend from their retail unit trusts, nor does M&G, although it does lend stock from the Prudential's life funds.
'How to buy protection insurance'
As this year has proved
European markets down after Brexit news
2,000 clients to go
Challenging parliamentary arithmetic