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Balanced funds are booming ahead of new EU regulations

In 2016 and 2017, Danish banks and mutual funds have been busy setting up balanced funds. Consequently, the number of balanced funds has increased by one third during this period, according to a tally by Morningstar for FWAM. The balanced funds work as an alternative to portfolio management services, which will be affected by a ban on commission payments from July 1 as part of the EU's Mifid II-regulations.

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Several Danish banks and mutual funds are hard at work on setting up balanced investment funds before the ban on commissions that comes into effect in Denmark on July 1 this year.

13 new balanced funds were set up last year, and so far, 2017 has seen 15 new funds. With 28 new funds, the total number of balanced funds has increased by one third to 92 in total, according to a tally by Mornignstar for FW Asset Management. According to FWAM's sources, at least six new funds are on the way.

"It's an obvious conclusion that this is related to Mifid II, but it also has something to do with Denmark generally lagging behind in balanced funds, which other countries have had for years. So I think the answer is a bit of both," says Christian B. Andreasen, Head of Individual Banking and Wealth Management at Handelsbanken in Denmark, referring to the new commission ban.

Optima palette expanded

In addition to the term "balanced" funds, the new funds are also known as "mixed funds" or "allocation funds", depending on the provider. They are offered by mutual funds distributed by Sydbank, Handelsbanken, Jyske Bank, and Sparekassen Kronjylland, among others. Additionally, Bankinvest, which distributes its funds through a large number of medium-sized and small banks, is expanding its offering of balanced funds.

Similar to Handelsbanken, Bankinvest names two reasons for the increased number of balanced funds.

"We are always looking at the supply of products. As the media has reported, different concepts are being developed for how the banks are going to handle the challenges that Mifid II brings. So it could have something to do with that. But we also believe that balanced products are going to become more popular. If we look to the rest of Europe, Denmark has a relatively small selection of balanced products," says Dag Holmstad, Head of Corporate Communications at Bankinvest.

In February, Bankinvest expanded its Optima palette by five funds. The first Optima funds were established in 2011 as three cumulative funds, and Bankinvest is now expanding with four income funds and one cumulative fund, thus adding a fourth risk profile to the palette.

According to Morningstar, Danish investors have DKK 86.1 billion (EUR 11.6 billion) in balanced funds. That equals 10 percent, against 4 percent in 2010, of the total assets in mutual funds.

Speaks to all customers

The ban on commissions has – as previously described by FWAM – prompted Sparekassen Kronjylland to completely shut down its portfolio management product. Instead, the savings bank offers four funds, Stable, Moderate, Growth and Offensive, under the brand Lokalinvest, with Sparinvest as administrator and Sparekassen Kronjylland as manager.

The funds are now being launched under the name of Lokalinvest – does that mean that you are planning on launching them to other banks as well?

"They are free to do that. But we have yet to see it happen," says Mads Lyhne, Head of Capital Market at Sparekassen Kronjylland, to FWAM.

Are your portfolio management clients the ones that have transferred their assets to the new funds?

"Not exclusively. The money comes from counseling each client individually. Because we cannot receive commission after July 1, and we have decided to shut down our proxy product, we have spoken with everyone who had a proxy product. A large part of that group chose one of the four products, while others chose different solutions," says Lyhne, and adds:

"I would like to emphasize that the primary reason for the shutdown of the former portfolio management product is a desire to produce a better and more transparent product for our clients. Of course we also make sure that the product lives up to the forthcoming law, and it's on that occasion that we have contacted all our portfolio management clients."

Sparekassen Kronjylland's funds can invest in different types of other funds and ETFs, and the bank uses various providers, such as Sparinvest, Bankinvest, and Blackrock. The bank has also obtained a mandate to invest in single stocks or bonds, but that is not the main purpose, says Lyhne.

Balanced funds are interesting to new clientele

At Handelsbanken, Christian B. Andreasen has no plans to shut down the bank's portfolio management products due to the ban on commission payments. For this reason, the capital in the portfolio management products should continue to build up. But he also expects changes to come.

"I hope for and expect it to grow bigger than it currently is, proportionately to the client inflow," he says.

"We are going to see some change in how banks offer investment products, but when it comes to allocation funds, it is now suddenly interesting to people who haven't previously had access to asset management because it was too expensive. So for that reason alone, I believe that we will see an increase in the number of people who choose to have their money managed."

As previously reported by FWAM, Jyske Bank is also offering its portfolio management clients to transfer to balanced funds. The bank is going to offer five funds with different risk profiles in both cumulative and income versions. Not all of the funds have been set up yet, but Jyske Bank informs FWAM that the remaining six funds will be registered at Morningstar in May at the latest.

Sydinvest has also launched eight funds with four risk profiles in both cumulative and income versions.

English Edit: Marie Honoré

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