Mutual-fund-to-ETF conversions have become a way for asset managers to refashion investment offerings for investors, but they can be lengthy and arduous processes, a new study has found.

Operational risks, such as constraints and logistical issues, pose challenges to asset managers looking to convert mutual funds, according to the recently released 2025 Investment Management Outlook from Deloitte.

These obstacles include brokerage account requirements, distribution channel arrangements and issues relating to managing fractional shares, the report stated.

There has been a total of 119 conversions, according to data from Morningstar.

This article was previously published by Ignites, a title owned by the FT Group.

The first one, led by Guinness Atkinson in 2021, was initially viewed as a revolutionary development that would galvanise the industry’s move towards ETFs and away from mutual funds, said Alex Alberstadt, counsel in the investment management group for Seward & Kissel, LLP, who worked on the conversion.

“At the time, they were looked at as a clean process. It felt like there were not all these bells and whistles and extra layers of costs,” Alberstadt said.

However, “there are operational issues that everybody has to be up front about, and when you plan a conversion, you have to manage through these issues,” she said.

More than $60bn in assets have been converted from mutual funds into ETFs, according to the Deloitte report.

Firms such as Dimensional Fund Advisors, Fidelity and JPMorgan dominated the flows across the conversions through April, Morningstar data shows.

A spokesperson for DFA declined to comment when reached.

Fidelity has recently filed to convert two municipal bond funds into ETFs next year, according to regulatory filings. Once the conversions are finalised, Fidelity will have completed 14 in total, according to Morningstar data.

“Fidelity believes the conversions will provide multiple benefits for investors of the fund, including lower expenses, additional trading flexibility and increased portfolio holdings transparency,” the manager said in a Q&A on the conversions published on its website last week.

A spokesperson for the manager did not respond to a request for comment on operational hurdles it has faced in the conversion process.

But analysts agree with Deloitte’s findings.

“There’s a lot of work in the background that goes into making these conversions go smoothly . . . If you’re going to do it, it has to be done right so that your clients have a simple experience,” said Dan Sotiroff, a Morningstar analyst.

“Conversion is usually for smaller funds and can be a distribution strategy as much as it is a marketing strategy. Companies can use them as a way to get flows, but that doesn’t necessarily pan out,” Sotiroff said.

As of September 30, year-to-date net flows into the mutual funds converted into ETFs stood at roughly $11.2bn in assets, according to Morningstar data.

And because clients need access to brokerage accounts to hold ETFs, conversions can be issues for firms whose clients do not use them. They can include clients’ holding 401(k) plans that do not typically use ETFs, according to Sotiroff.

“At a high level, you have to make sure your clients can actually hold the ETF — and that’s just the start,” Sotiroff said.

Fractional shares also present issues, because they are available for mutual funds but not for ETFs.

Mutual fund fractional shares must be redeemed at the net asset value of the strategy during a fund conversion, but timing is a factor, Alberstadt said.

Because ETFs do not issue fractional shares, mutual fund shareholders who want to redeem before a conversion may incur additional taxes when those shares are sold.

That information must be communicated to clients and service providers in a succinct manner, Alberstadt said.

“The issues on fractional shares all have to be planned out. There’s multiple intermediaries at the table, and it requires resources and attention,” she explained.

Firms must post a transaction review and ensure that the process was managed properly, she said.

Some of the operational challenges of conversions could be mitigated by regulatory approval of the dual-share class fund structure that was long-patented by Vanguard, Alberstadt and Sotiroff both said.

An ETF share class option would be a favourable alternative to conversions, Karin Risi, a Vanguard managing director of the firm’s strategy, product, marketing and communications, said during a panel discussion at the Financial Times Future of Asset Management conference held in New York.

The conference was co-sponsored by Ignites.

“In the instance where you have the multiple share class opportunity, you don’t need to go through the much more cumbersome and operationally intense process of converting a mutual fund,” Risi said. “Adding an ETF share class onto a fund is a cleaner process.”

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.

Good morning and welcome to your Morning Briefing for Friday 11 October 2024. To get this in your inbox every morning click here.

Business owners fast-tracking exits over CGT concerns

UK business owners have fast-tracked their exit plans over the past 12 months, according to new research from Evelyn Partners.

Nearly one in three (29%) have accelerated business exits in the past year, amid rumours CGT rates could take centre stage in the upcoming Budget.

This is an uplift on the 23% who said 18 months ago that they had brought forward business exits over the previous year.

The research found nearly a third (23%) of the 500 business owners with turnovers of upwards of £5m surveyed by Evelyn Partners who had fast-tracked their exits in the last year had done so because of worries about an increase in CGT.

Is a shrinking protection market bad for competition?

The UK protection market is lucrative but cut-throat as insurers battle for a shrinking market share amid an ongoing squeeze on incomes. This has affected their bottom line, making some businesses unviable.

However, experts say the departure of insurers has been happening since the 1990s. Notable names include AXA, Bupa, Old Mutual and Scottish Provident.

“Insurers large and small have always come and gone from the protection market,” says Kevin Carr, protection consultant and MD at Carr Consulting.

Consolidation of consolidators will not be a ‘dramatic shift’

If the consolidation of consolidators mooted for the advice space happens, it will unlikely be a “dramatic shift” in the market, NextWealth consulting director Emma Napier has suggested.

Napier told Money Marketing she believes consolidation of consolidators could happen, but it is not going to be a “great big turn” for the industry.

“It comes down to the process that a consolidator has managed to embed,” she said. “The consolidation of consolidators will only occur if the seller finds the process [of buying small advice firms] too slow and needs to recapitalise, and the buyer can quickly see a clear route to market.

Quote Of The Day

As the old saying goes, failing to prepare is preparing to fail – and nowhere is this more pertinent than on Budget Day.

– Hannah English, head of DC corporate consulting at Hymans Robertson, comments on the importance of DC schemes ahead of the upcoming Budget.

In Other News

As part of Abrdn’s overall sustainability strategy, the Abrdn Charitable Foundation (aCF) has launched its inaugural innovation fund.

The fund is open to charitable organisations and other non-profit entities across the globe.

Organisations from across the UK, Americas, Asia-Pacific and EMEA, the four regions where Abrdn operates, are encouraged to apply.

One grant up to a maximum of £50,000 (or local currency equivalent) to be awarded per region.

The fund is looking to provide organisations with resources to pilot new projects linked to technology and innovation within ‘Tomorrow’s Generation’.

This features two themes – people and planet, which includes helping people overcome barriers and gain access to opportunities aligned with education, employment and financial wellness, as well as protecting nature and addressing climate change.

The application window for 2024 is from 1 October to 1 November.

UK executives dump shares on fears of Labour capital gains tax raid (FT)

Why even at 20 you should care about pension changes (BBC)

Dollar bulls suffer setback as traders add to Fed cut bets (Reuters)

Did You See?

Mark Dampier, an independent financial consultant, explores the reasons why active management is over.

He writes: “The changing nature of the asset management industry is a wonder to behold.

“When I first started out, the main recommendation for investment was a managed bond. Partly because so many adviser firms were being set up by those who had worked in the insurance industry selling life bonds and also because they would pay 5%-plus commission.

“At that time, unit trusts paid 3%. It wasn’t hard to see what was going to be sold the most.

“The 5% withdrawal, often described as tax free, was another selling point. Do you remember the income surcharge investors had to pay for their dividends too, again helping the sales of insurance bonds? And, of course, no regulation to begin with. What a cowboy’s charter.

“It’s good to see how much has changed – mostly for the better. The Retail Distribution Review was a big change, and the Consumer Duty has signalled a turning point for old poor practices.

“Meanwhile, the active management industry is now under the most pressure I have ever seen.”

Read the full article here.

IT’S FAIR to say that Alton Towers is one of the UK’s most-loved theme parks.

If you’re thinking about visiting the attraction, make sure you read our essential guide first.

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Alton Towers Resort is one of the UK’s most popular theme parks, with 40 rides and activities spanning from record-breaking rollercoasters to an indoor and outdoor waterpark.

Established on April 4, 1980, the Staffordshire-based theme park’s initial rides included the UK’s first-ever double loop roller coaster — the Corkscrew.

It is the largest theme park in the UK, covering 550 acres.

A new £12.5 million indoor rollercoaster codenamed ‘Project Horizon’ is set to be built, but very little is known about the project so far.

Opening times

Alton Towers opened its doors for 2024 on March 16.

The theme park closes over the winter, and this will be on November 7, 2024.

However, the theme park runs a number of seasonal special events, which are detailed below.

How to get there

The address for Alton Towers is Farley Lane, Alton, Stoke-on-Trent. ST10 4DB.

Located in Staffordshire, near the village of Alton, the nearest motorway exits are:

• M1 Northbound – Junction 23a
• M1 Southbound – Junction 28
• M6 Northbound – Junction 15
• M6 Southbound – Junction 16

For those travelling by public transport, Uttoxeter is the nearest train station to the resort.

From there you can take a 20-minute taxi or the 30-minute X41 bus.

An Alton Towers coach is also bookable through their website.

The bus departs from Birmingham Newman University, Northfields Super Store, University of Birmingham, TK MAXX New Street and Freffs Scott Arms Shopping Centre.

Ticket prices

Like most parks, it’s always cheaper to buy Alton Towers tickets in advance from their website.

Advance Alton Towers tickets can start at:

• 1 Day Pass — £29
• 2 Day Pass — £48
• Short break at the onsite hotel — £90 per family
• Waterpark pass — £18
• Golf 18 Holes — £6

On the day tickets start at:

• 1 Day Pass — £69
• 2 Day Pass — £80
• Waterpark pass — £25
• Parent and Toddler pass — £68

The theme park sells annual passes with discounts.

Alton Tower’s £99 Silver Pass can get theme park lovers up to 10% off food and drinks and a further 10% off the waterpark and Alton Tower’s Dungeon.

The £139 Gold Pass will beef this discount up to 20% and offer benefits such as a Bring a Friend voucher and Discounted Fastrack.

Merlin Annual Pass holders get a minimum of 200 days of off-peak entry to the park.

You can buy tickets on the day you visit from the admissions team, but prices are subject to availability and bookings may sell out.

Alton Towers’ best rides

Best for thrill-seekers — Nemesis Reborn

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Or features writer Richard Moriarty for The Sun tested out the latest addition to the park with his son, and had this to say about it:

“Daddy, this is awesome!” screamed my son as we were whizzed around the 716-metre track at speeds of up to 55mph.

As the name suggests, Nemesis really has been reborn. And wow. What a thrilling ride it offers.

Smooth, slick, exciting and terrifying in equal measure — it is a rollercoaster where, when you get off, you are not quite sure what just happened.

Best for families — Runaway Mine Train

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Runaway Mine Train is now the oldest rollercoaster at the theme park.

Even so, everyone enjoys a trip on this family-friendly coaster.

Plus, if you are patient and wait to ride later in the day, you might even be lucky enough to whizz around the track three or four times.

As The Sun’s Richard Moriarty explained: “… our gruesome twosome could ride together as they are both big enough, allowing mum and dad to enjoy a coffee.”

Best for toddlers — Get Set Go Tree Top Adventure

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Advertisement

This is the perfect place to start your family day out.

You can wake up the sleeping bugbies as you glide high above CBeebies Land on this toddler-friendly rollercoaster track.

Some of the other popular kids’ rides can be seen below, so you can also plan the rest of your day while up in the air.

Alton Towers events

Scarefest

Alton Towers runs a spooktacular annual Halloween Scarefest.

This includes Compound – a new live-action scare maze based on the Nemesis Reborn ride.

There is also a family-friendly interactive attraction called Amigos in the Afterlife.

Christmas

Their Christmas Day Out experiences (available on select days only) are the perfect way to escape dark and dreary winter days.

And for those wanting to immerse themselves in the magic of Christmas overnight, the park also runs Santa Sleepovers.

How to save money at Alton Towers

Thrifty mum-of-three Catherine Loftohouse gave her top tips on saving money when visiting the theme park.

She told The Sun: “If you pay on the day, it could cost £68 per adult and £64 per child at Alton Towers, so this year we saved about £280 just on that one day trip.”

Catherine continued: “This year, we visited Alton Towers in September and spent about £45 on six tickets.

“My brother and I both got a pair of Sun Superdays tickets as he lives in a separate household.

“Each pair costs about £9, as it’s the cost of nine copies of the paper (70p or £1 depending on day of the week) and then a £2 booking fee.

“Meanwhile we used a £25 adult and toddler ticket from the Alton Towers website for my husband and youngest son.”

There are many other ways to cut down on your trip.

Children under 3 can go free and the theme park offers Student tickets for £20 if you have a verified StudentBeans account.

Any parents visiting with a toddler (under 5) can save by purchasing a Parent & Toddler pass in advance for £29.

Additional children under 5 can be added onto the pass for just £5. This offer is not available during weekends and school holidays.

And as mentioned by Catherine, through Sun Savers you can unlock our Sun Superdays offer, which gets you two free tickets to Merlin attractions, including Alton Towers.

Find out about fastrack

Alton Towers fastrack tickets offer a variety of benefits.

As their website explains, these advantages include:

• Less time queuing: Exclusive fastrack queue lines offer reduced waiting time on some of our biggest rides and attractions. That means you have more time to explore and enjoy everything that we have to offer.
• Help planning your day out: Single shot fastracks come with a specific time slot to enjoy your favourite ride. Set up your fastrack slots to help plan an efficient thrill-seeking route around the park.
• Unbeatable package deals: Alton Towers’ packages combine some of our biggest thrill rides and family favourites. Book your fastrack experience as part of a package deal to enjoy big savings.

Alton Towers parking explained

There are a number of options for parking your car at the theme park.

Standard parking costs £10 for guests. 

Gold, Platinum and Premium Merlin Passholders are entitled to free Standard Car Parking.

There is no need to pre-book your parking space as you can just scan you pass at the exit barriers.

Standard Parking is between 15-25 minutes walk to the Alton Towers’ entrance.

You can follow the road signage to the carpark, or ask members of staff for directions.

As there are both grass and tarmac car parks, you may be parked on grass.

Express parking is charged at £20 for guests and can only be booked online in advance.

Gold, Platinum and Premium Merlin Passholders are able pre-book Express Parking for £10 (must be pre-booked online in advance).

CBeebies Land Hotel Guests get free express parking, but hotel booking confirmation must be provided.

Express Parking is a 1-3 minute walk away from the Theme Park Entrance.

Blue badge parking is charged at £10.

Gold, Platinum and Premium Merlin Passholders and on-site hotel guests are not charged for blue badge parking — but your current and valid blue badge must be presented, with the badge holder present in the vehicle which is requesting disabled parking.

One vehicle is permitted to park on blue badge parking per blue badge (spaces on the day will be allocated subject to availability on a first come first serviced basis).

Average Alton Towers queuing times

According to QueueTimes.com, the average waiting times for the park’s top 10 busiest rides are as follows:

• Wicker Man — 48 minutes
• The Smiler — 46 minutes
• TH13TEEN — 34 minutes
• Rita — 32 minutes
• Galactica — 31 minutes
• Spinball Whizzer — 28 minutes
• Gangsta Granny: The Ride — 26 minutes
• Get Set Go Tree Top Adventure — 26 minutes
• Octonauts Rollercoaster Adventure — 26 minutes
• Runaway Mine Train — 25 minutes

While you’re here, take a look at Legoland Windsor, Thorpe Park and Chessington World of Adventures‘ opening dates, ticket prices and locations.

This week was a landmark for UK pensions, with the launch of a new collective pension arrangement offering the potential of better retirement outcomes for millions of people.

On Monday, Royal Mail became the UK’s first employer to offer a collective defined contribution (CDC) pension to staff — six years after it was originally announced. 

The government also published plans to boost the take-up of CDC by allowing multiple employers to join a single plan, in contrast to Royal Mail’s single employer plan.

CDC seems to offer a higher and less risky pension than individual DC, as well as boosting investment in UK private assets. But can it really do what it says on the tin?

Private sector defined benefit (DB) pensions, guaranteed by an employer, are all but extinct, replaced by defined contribution (DC), with people saving into individual pots and taking their own investment and longevity risk.

CDC sets an annual “target pension”, based on the value of assets from employee and employer contributions, plus investment returns. Target pensions are not guaranteed, but can move up or down each year — including for pensions already being paid — depending on asset values.

To fund its ambitious growth plans, the government is trying to push pensions into UK “productive assets”, and it hopes CDC is another pool of money to be invested in infrastructure, start-ups and private equity.

In 2023 major pension providers signed the Mansion House Compact to allocate 5 per cent of assets in the DC “default” funds to private assets, and the government hopes about £50bn will be invested by 2030.

By how much CDC could increase this target depends on CDC take-up, and the allocation to private assets.

Since Royal Mail’s announcement six years ago, no other companies have signed up to CDC, and no pension provider has said it will set-up a multi-employer CDC.

Suppose 10 per cent of DC assets move into CDC, and that CDC holds 10 per cent in private assets, double the Mansion House DC target. Overall DC and CDC private assets would only increase to 5.5 per cent, barely moving the dial versus DC alone.

But CDC fans claim it can hold a much higher chunk of higher-risk assets than DC, because of “intergenerational risk sharing”, when members of different ages pool investment risk and longevity.

This claim gets to the heart of the CDC fallacy. For any asset allocation, CDC investment risk is exactly the same as DC.

Intergenerational risk-sharing is a myth, because legislation prohibits “buffers” to “smooth” outcomes. CDC plans are not allowed to hold assets in a buffer, to be released when returns are worse than expected, or added to when returns are better than expected, as with discredited “with-profits” policies.

If CDC assets fall by, say, 20 per cent, target pensions also fall by 20 per cent for all members — an 80-year-old pensioner, or a 30-year-old employee.

This is exactly the same as a DC saver with their own pot. If assets fall by 20 per cent, their “target pension” falls by the same amount.

We shouldn’t fall for the false promise of better retirement outcomes by shifting to complex, opaque and costly CDC pensions

Identical contributions and identical asset allocation produce identical CDC and DC returns, but, of course, CDC comes with higher management costs. The government should not expect CDC to hold any more private assets than DC.

CDC also imposes the same asset allocation on all members, regardless of their age or risk preference. DC gives everyone the flexibility to choose their own level of investment risk, which may change as they approach retirement. 

What about Royal Mail’s CDC? It has 6 per cent member and 13.5 per cent employer contributions, giving an inflation-linked target pension of 1/80th of salary, plus 3/80ths cash, from age 67. Over 40 years, members could earn a target pension of half average salary, plus a cash lump sum of three-times pension. 

But this looks unexciting — at today’s inflation-adjusted long-term gilt rates it’s an average return of only gilts plus 1 per cent. A DC saver could achieve the same “target pension” by holding low risk-gilts and corporate bonds, with just a smattering of higher-risk equities.

CDC was really only ever attractive to the few private sector companies still offering DB, not the overwhelming majority with DC. But now the annual cost of DB pension promises has been slashed, thanks to much higher long-term interest rates, these companies have no incentive to close their DB pensions and make the leap into the CDC-unknown.

Although there are no “magic beans” in Royal Mail’s CDC, what sets it apart from “normal” DC is the generous 13.5 per cent employer contribution, higher than most blue-chip companies, and much higher than the 3 per cent legal minimum. 

And total contributions of almost 20 per cent of salary are enough for Royal Mail staff to build-up a decent DC pension pot, and a decent pension.

We shouldn’t fall for the false promise of better retirement outcomes by shifting to complex, opaque and costly CDC pensions. The only real way to improve pensions is with simple, transparent and cheap DC pots, and higher contributions.

John Ralfe is an independent pensions consultant. X: @johnralfe1

Good morning. News to start: The US is working on plans to participate in a $50bn G7 loan to Ukraine even if the EU fails to meet a demand to adjust its related sanctions, officials told us.

Today, Laura reports on potential plans to house EU immigrants in neighbouring countries, and I question whether, among the Eurosceptic bluster, Viktor Orbán may have a point about EU hypocrisy on Russia.

Have a wonderful weekend.

In the neighbourhood

In their quest for “innovative solutions” to bring down migration numbers, EU countries are considering asking neighbouring countries — for instance in the western Balkans — to take in unwanted immigrants, writes Laura Dubois.

Context: Migration has climbed high up the EU agenda, as several countries complain their asylum systems are overwhelmed. A recent EU asylum reform will only come into force in 2026, prompting creative capitals to single out third countries to take on the problem.

Such deals with third countries are fraught and expensive, as the recently-abandoned UK plan to send asylum seekers to Rwanda showcases. But more and more EU countries are warming up to those schemes, especially after Germany signalled it would no longer exclude them.

“This is very high on the political agenda today,” Sweden’s migration minister Johan Forssell told journalists yesterday, saying that all his conversation partners from Socialists to the centre-right European People’s party agreed the topic of migration was urgent.

Home affairs ministers yesterday discussed how to increase returns, as the EU struggles to send people whose asylum applications have been rejected back to their home countries — often because those countries do not accept them back.

One option discussed by the minister were so-called return hubs, where rejected people would await their deportation. “We should not close our door to that,” Forssell said. “I think we are ready now to take that to the next phase.”

The western Balkans was floated as one possible location for such a hub, EU officials said, pointing to Italy’s asylum deal with Albania as a promising example. But the officials also added that more technical work was needed to understand whether the hubs were legally feasible, and which country would consent.

Ministers yesterday also urged the European Commission to update a dedicated law on returns that has so far remained stuck in the European parliament, the officials said. 

“We want to have stricter legislation on what you are supposed to do as an individual . . . it’s not voluntary. You need to go back home,” Forssell said.

He added that the EU should also change its tack on countries that don’t take back their citizens, making development aid or trade contingent on accepting returns. “If we are going to co-operate with them, they must co-operate with us,” he said. 

Chart du jour: Shock therapy

France has proposed a budget for next year with around €60bn worth of spending cuts, as it tries to narrow its deficit.

Awkward truths

Viktor Orbán’s European parliament performance this week was mainly political theatre designed to elevate his status as the EU’s bête noire, rev up his populist allies in the chamber and thumb his nose at the mainstream centrist majority.

But he also landed some legitimate punches.

Context: Orbán’s self-styled “illiberal” regime is the EU’s most pro-Russian government. He has repeatedly delayed or blocked support packages for Ukraine and sanctions against Moscow, and endorsed former US president Donald Trump’s demand for an immediate ceasefire in the war.

Orbán on Wednesday rolled out his standard Eurosceptic rhetoric, accusing Brussels of using “political weapons” against him and other rightwing politicians, and calling for “normal” relations with Russia — something European Commission president Ursula von der Leyen rightly skewered him for.

But Orbán’s remarks about EU hypocrisy on Russia struck a nerve.

Criticised by MEPs for his fondness for Russian trade relations, he hit back by claiming that exports of EU goods to “certain central Asian countries” — widely understood to be conduits for Russian imports — are €1bn a month higher than before the full-scale invasion of Ukraine, suggesting widespread sanctions evasion.

He also cited research that suggests Russian crude oil purchases by western countries have surged since 2022, earning the Kremlin billions of dollars in additional tax.

And after von der Leyen condemned him for a visa programme used by Russians to enter Hungary, Orbán pointed out that the 7,000 Russians working in his country were dwarfed by hundreds of thousands of Russians working in Germany, France and Spain.

Orbán’s whataboutisms don’t justify his political rhetoric. But his charges of hypocrisy should be taken seriously by mainstream EU leaders who are quick to paint him as the reason why Brussels has not been tougher on Moscow. That may not be entirely true.

What to watch today

1. EU justice ministers meet in Luxembourg.

2. Ukrainian President Volodymyr Zelenskyy visits Germany.

3. Cyprus hosts summit of Mediterranean countries.

Now read these