Morningstar - Q4 2021 - 26

Dispatches
development may be one reason. Firms may not
exercise a high degree of discipline when
developing new strategies. They might offer a
wide variety of funds, see what sticks, and
close those that fail to gather assets in a timely
fashion. Here are the top firms as ranked
by the number of funds they shuttered between
2005 and 2020:
Fund Closures by Fund Provider
Provider
Invesco
Direxion
IShares
John Hancock
Guggenheim
UBS
Franklin Templeton
JPMorgan
Virtus
Source: Morningstar Direct. Data as of 12/31/2020.
Invesco's liquidations and mergers are far in
the lead, with most closures occurring between
2018 and 2020. This coincided with the
acquisitions of two of its smaller competitors:
Guggenheim's ETF business in 2018 and
OppenheimerFunds in 2019. So, the bevy of fund
mergers in these years were part of an
effort to consolidate funds from those acquired
lineups with similar strategies already
managed by Invesco.
Fund providers like Capital Group and Dodge &
Cox are at the other end of the spectrum,
with very few closures over this period. These firms
are more cautious in launching new funds
and are likely loath to close existing ones. From
2005 through 2020, Capital Group liquidated
just one fund (Capital Group Emerging Markets
Total Opportunities), while Dodge & Cox didn't
shutter any.
Fund Closings by Fund Type
The growth of index investing and particularly
the rise of strategic-beta funds were major trends
during 2005-20. However, these index funds
accounted for only a small portion of the funds
26
Morningstar Q4 2021
that were closed or merged away during this span.
Rather, actively managed funds accounted for
most fund mergers and closings. The composition
of the fund universe partly explains this, because
actively managed funds still represented most
of the funds in the sample. So, actively managed
funds primarily drove the steady increase in
closed funds over this period.
Liquidated
163
104
104
75
77
79
66
60
39
Merged
120
1
17
3
13
9
30
In sum, closed funds tend to shut down within
their first few years and typically have small
assets under management, relatively higher fees,
and poor recent performance in their
respective categories. Additionally, some caution
should be used when selecting a fund provider. By
identifying the common traits of shuttered
funds, investors can more effectively identify-
and avoid-those that are likely to close.
Daniel Sotiroff is a manager research analyst, passive
strategies, at Morningstar Research Services LLC.
Ryan Jackson is an associate manager research analyst,
passive strategies, at Morningstar Research Services LLC.
under management. It's a niche that's been
around for a while, but it's one that continues
to grow as concerns about climate changeinduced
water shortages, and interest in investing
in ways to adapt to or avert them, grow. Money
managers have launched six new water
funds over the past year, and the group has seen
inflows of $3.9 billion during that period.
Unlike energy and agriculture commodities
markets, the water business is fragmented and
highly regulated by the municipal, agricultural,
and environmental interests that use water
the most. Because of this, none of these open-end
water funds invest directly in water rights
or have direct exposure to the price of water.
Rather, they invest in companies that fund
managers believe have exposure to the price of
water through selling it, treating it, or using
it as an input. Holdings typically fall under four
broad categories.
1 Water utilities: regulated companies that provide
clean drinking water and/or wastewater
management.
Are Water Funds
Too Watered Down?
Sitting at the intersection of two key trends in
investment management-sustainable
investing and thematic investing-are water
funds, which seek to invest in companies
that are leaders in limiting their water usage or
creating innovative solutions to increase the
availability of clean drinking water.
There are countless ways to justify an investment
as influencing clean water availability.
This flexibility, exercised at the discretion of the
manager, leads to a broad investment menu.
As a result, their portfolios are often watered down
with holdings that may have little to do with
the business of water, which drives performance
that resembles common equity indexes rather
than anything differentiated.
Morningstar curates a list of about 65 water
funds globally that have about $35 billion in assets
2 Water transportation: pumps and pipes, as well
as companies that improve water delivery.
3 Water technology: companies that produce
equipment to treat or purify water.
4 Miscellaneous: companies that may have little
to no exposure to the water industry but may be
considered leaders in water efficiency.
It's hard to verify whether managers are sticking
to their professed water-focused strategies,
because besides water utilities, there are no
globally recognized aqua sectors, industries, or
subindustries. You must dig into the portfolio
holdings themselves.
Xylem XYL, a water treatment and testing
company, is a common holding. Its exposure to
water availability is straightforward and
intuitive; so is regulated water and water
treatment utility American Water Works AWK
and water treatment provider Pentair PNR. From
there, the connection gets diluted.
Danaher DHR is a nearly 9% position in both
Invesco Global Water ETF PIO and Invesco Water
Resources ETF PHO. The life sciences conglomerate
Morningstar - Q4 2021

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