Parting ways: Making the tough decisions around fund and investment option closures

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Author: Erin Weaver

Guidance from one of our most senior product managers

Closing a fund or an investment option?

‘Navigating the complexities of fund closures can be a daunting task. As a product manager, you carry the weight of ensuring the best interests of your investors while grappling with various challenges that may arise during the closure process’ - Victoria Hugh, Mayflower’s Senior Consultant and resident Senior Product Manager.

In this first article of an ongoing series around product management, Victoria provides insight into the decision-making process around product closure, what factors to consider and how to achieve the balance between ensuring the best interests of your investors and safeguarding your business.

Before getting into details, it’s important to remember that there are specific circumstances in which a scheme must be wound up, and these are set out in section 601NE of the Corporations Act. This article covers the more common issue of ‘too many products, not enough customers in each’.

Knowing when to cut the strings

No matter what challenge your product may be facing, the decision to close is never an easy one. Closure can be a complex and costly exercise, taking longer than expected, and can have a significant impact on a business and investors. However, a well-planned assessment of all the potential risks and delays will put your business in good stead to make the correct decision and to weather any impacts.

It’s no accident we are covering this topic now. With the increase in mergers and takeovers, there has been a flurry of fund closures and consolidations industry wide.  Product managers are finding themselves with numerous portfolios, which is not necessarily a good thing. This is not just our opinion, the ‘too many products’ problem has been a hot topic in the media of late.

Mercer flags super funds’ ‘underdeveloped’ Choice menus - Super Review

ASIC calls on industry to improve oversight of Choice super performance - ASIC

FSI to hand back $14bn to investors amid fund closures - Investor Daily

Whilst the trend in the past was to favour a larger number of products to attract a broader and varied investor base, managers are now streamlining their offerings as product costs balloon and the market becomes saturated. The juxtaposition is stark – removing products can reduce costs but may also lead to a loss of investors. Product managers are now being asked to make big decisions with potential bigger impacts, in some cases without the experience or correct framework.   

There are numerous questions to ask internally when deciding to close a product. How many products or options are too many and how do we know when to cut a product loose? What is the process for closing a product and who needs to be involved?

For these and more, the answers aren’t always so straightforward.

Motivations for closure

There are many possible reasons why a fund or investment option should be considered for closure, with some being:

  • Lower than expected investment – the ‘build it and they will come’ never happened. Don’t we all love this one!

  • FUM dropping through investors leaving – sometimes a once popular investment approach may no longer be in favour with investors.

  • Performance woes – despite best efforts, the investment objective and criteria aren’t delivering anymore, and the product can no longer meet its purpose.

  • Regulatory pressures – failing performance tests can add strain to a product and be cause for a review.

  • Financial & brand implications – high fees coupled with poor performance can reduce investor/member confidence.

Impact to investors

If it’s allowable under the constitution, whatever the reason for closure, it’s imperative to understand the impact on the existing investors/members in determining whether it is in their best interests to close.

Ultimately fund managers do need to answer to regulators and regulators must be satisfied that investors are not going to be negatively impacted by the closure.

Impact to business operations

The impact of a product closure on a business can be significant so there isn’t always a lot of enthusiasm for it at an operational level. Besides the financial costs, there’s a considerable time investment required and with delays, this can be significant.

Understanding the capacity of the team to complete the process, without significant negative impact on other areas of business, is a key consideration in deciding when to close a product. A thorough assessment should draw out anything that could derail the process and thus make closure a non-viable option at this point in time.

Financial impact

While closing a product may appear to be in the best interests of investors/members, it's important to calculate the financial implications and ensure that the expense of closure is justified by the anticipated benefits.

Key considerations with direct/indirect costs:

  • Constitution/Trust Deed/Approvals – what are the wind-up powers and provisions in the constitution/trust deed; within your product governance framework what are the steps required to make the decision?

  • Legal support – it is prudent to seek an external view on a closure especially if it’s not straightforward.

  • Unitholder meeting and possible vote – this may be necessary under the constitution.

  • Managing investor/member communication is crucial to a successful closure and can be complicated where advisers also need to be included.

  • Operational cost and effort in planning a closure can take time particularly if you’re in a large business or dependent on registries/custodians with blackout periods.

  • Redeeming assets – there can be costs incurred for redeeming assets ahead of time along with possible losses. These need to be factored into final windup costs.

  • Financials – informing your finance team as soon as a closure is going ahead can help with planning and saving on expenses. Additional audit costs can add up if your closure is outside of the usual financial year end.

Potential roadblocks to closure

Despite the best planning, there will inevitably be something arise that will delay a closure. These are some of the most common culprits:

  • Types of investments – illiquid investments and/or offshore investments can be harder to redeem than others and, in some instances, be tied up for years.

  • Stakeholder pushback – boards or management can hold up the process or externally, the advisers and investors.

  • Resourcing constraints – there isn’t capacity within the business to work through all the practical aspects of closure.

  • Legacy products with complex structures.

At Mayflower Consulting, we have extensive experience advising super funds and fund management businesses on product portfolio management. We are obsessed with detail and risk management and can help you avoid the common pitfalls of a product closure. Let’s talk!