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Stock lending profits should go to fund investors, says IMA

The Investment Management Association says European regulators are right to insist all stock lending profits go back into funds.  

Stock lending profits should go to fund investors, says IMA

The UK trade body for fund managers has backed calls for investment groups to pay all profits they earn from stock lending to investors.

A recent survey by SCM Private showed that half of the largest UK fund managers lent out stock and on average pocketed a third of the income generated.

The Investment Management Association (IMA) said this was wrong and compared the income from stock lending to the dividends paid on shares or the coupons on bonds.

Julie Patterson, an IMA director, said: ‘Frankly, they [the stocks being lent] are the fund’s assets. There is a risk to that lending and there should be a return to the fund’s investors. These assets don’t belong to the fund manager.’

Patterson’s comments follow moves by European regulators this week to force fund managers to disclose more information about their stock lending activities.

The European Securities and Markets Authority (Ema) issued guidelines to operators of exchange traded funds (ETFs), including a requirement to give all lending profits, after costs, to their funds.

The European Commission yesterday responded with a consultation paper proposing to make the requirement binding on all investment funds controlled by Europe’s Ucits legislation. This would cover actively managed funds as well as passive index trackers.

Patterson said: ‘Although Esma’s guidelines are not binding they clearly set the tone forwhat the regulators think.’

However, she defended fund managers' use of 'sale and repurchase' agreements in which a fund sells some stock but agrees to buy it back. In rocky markets these were a useful way of raising cash quickly, which fund managers could use to buy derivatives to alter their market exposure.  

Dangers of stock lending

Since the 2008 financial crisis regulators have grown concerned that although retail fund managers are a main source of stock lending, most fund investors are unaware of the practice and the potential risks it poses.

The main dangers from stock lending are that the counterparty borrowing the shares goes bust and is unable to pay back the shares, although lenders can be insured against this.

There is also a risk that the collateral left by the borrower – in addition to the payment of a fee – falls in value and does not cover the shares on loan. This is quite possible as the collateral is often a completely different asset to the stock being lent – for example, shares in Japanese companies being used as collateral for UK shares.

Defenders of stock lending say it helps to keep stock markets liquid and to ensure share transactions settle on time.

Groups such as BlackRock and HSBC also say it enables them to keep fund charges low.

However, Patterson said it would be more transparent if fund managers revealed their charges both gross and net of stock lending income.

Mark Dampier, head of research at Hargreaves Lansdown, a leading funds platform, agreed that all stock lending profits should go back to the fund. ‘I don’t understand why it wouldn’t,’ he said.

Data on Hargreaves Lansdown’s website shows the wide range of practice by investment groups.

BlackRock, the world’s largest investment group, can lend up to 95% of the shares held by its tracker funds and gives just 60% of lending income back to the fund. The same applies to iShares, the ETF provider it owns.

HSBC Asset Management challenged the information on Hargreaves’ website showing its tracker funds could lend 70% and shared 60% of the income.  A spokeswoman said this was wrong and the most one of its funds could lend was 20% with 75% of income returned to the fund. The 25% retained by HSBC was just to cover costs and included no profit.

With HSBC’s ETF range the situation was slightly different. Again the most that could be lent was 20%, said the spokeswoman,  but the amount of income share given to the fund dropped to 60%. Of the remaining 40%, 25% went to HSBC Securities Services as a lending fee to cover costs and 15% went to the asset management business as profit.

Vanguard, the US tracking fund specialist, can lend up to 100% of the shares in its funds but gives 100% of the proceeds back to the funds.

Fidelity can lend up to 50% of a fund’s assets and gives away 92% of the proceeds.

Legal & General and M&G don’t stock lend at all on their index-tracking funds

In a statement, BlackRock described the Esma guidelines as ‘a positive step’ and said it had campaigned for greater disclosure and transparency.

It added: ‘BlackRock intends to work with Esma and national regulators to understand the application of the guidelines, as they move towards implementation, to preserve the benefits of securities lending for our clients and the broader capital markets.'

7 comments so far. Why not have your say?


Jul 27, 2012 at 10:09

Surely what these managers have been doing is illegal. Gambling with unit holders assetts. The FSA should act immediately.

If managers did not pocket these profits some might actually beat the index.

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David 111

Jul 27, 2012 at 10:38

I am switching most of my holdings into directly held company shares and out of funds, trusts etc. The more I find out about the investment industry the more it gives off a bad odour. "Where are the customers' yachts?"

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Jul 27, 2012 at 12:35

Have these guys escaped from the banking industry?

Just where do they learn their ethics?

Do they have any?

Totally agree with you Muggle.

As you suggest David, I've invested directly for years - you know the risk is all your own and you can regard it as long or short term as is your wont.

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C. Caribou

Jul 29, 2012 at 01:44

Stock lending is not illegal and is no more gambling than any other investment. Most of the profit goes to the investors.

It does introduce the risk that the party borrowing the shares becomes insolvent which is why it is not a good idea.

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Jul 29, 2012 at 09:01

Of course it is more risky than buying shares. The risk is doubles. Firstly the risk in the shares themselves then the risk in the borrower. All the profit minus a reasonable management fee should go to unitholders.

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Jul 29, 2012 at 09:55


There are lots of "wrongdoings" which are not illegal and we've seen far too many examples in recent years from people who should know better.

The fact is the higher risk of stock lending is not advertised as part of the deal to the investor. Therefore either it should not be used or it should be declared up-front.

I can forsee that the public perspective of the investment/savings camp is going to crystalise into:

1] those organisations whose policy/strategy is totally ethical

2] the rest.

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Not all ETF's are the same

Jul 29, 2012 at 20:38

... No mention of losses and percentages thereof going to the fund and the management company....

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