Last week, BlackRock announced a change to stock lending policies in its funds, a change which will impact iShares ETFs and BlackRock's actively managed fund range. They had previously capped stock lending to 50% of each fund’s assets; this cap was removed on 22nd June 2015.
What is stock lending?
Stock lending is a process where a fund or ETF lends out its underlying holdings (shares and bonds) in exchange for a fee. The fee offsets some of the fund management costs, resulting in lower charges for investors.
The removal of the 50% cap on stock lending means BlackRock's funds can now lend more of their portfolio and potentially make more revenue. BlackRock refunds 62.5% of lending revenues to the fund, retaining 37.5% for running the scheme.
Please note that historically stock lending has rarely hit the cap. For iShares ETFs domiciled in Europe, the average amount lent has been less than 10% in the year ending 31st March 2015 although it was higher in some funds. This change will permit BlackRock to lend more in the funds in the future where they see demand or when they believe it will be beneficial to do so.
How do the funds manage stock lending risk?
Throughout the loan, the fund remains the beneficial owner of the shares, is entitled to all dividends and has the right to recall the stock at any stage. The fund is normally given collateral (often cash or a different stock) to hold whilst the stock is on loan, but there is a chance that the fund could lose money if the borrower defaults or the loan can't be recovered for whatever reason. In this case, the collateral will be used to refund the fund. The risk that a borrower fails to return borrowed stock is sometimes called counterparty risk.
BlackRock go further than some managers, providing its European funds with an indemnity against losses. If funds incur losses as a result of a borrower default, BlackRock will fully refund the funds' costs under the terms of the indemnity. This gives BlackRock an incentive to select only secure borrowers. Since BlackRock's lending programme started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to clients.
Does the change impact BlackRock's Tracker fund range?
No. BlackRock's tracker fund range is currently permitted to lend 100% of stock. This move brings iShares ETFs and BlackRock's actively managed fund range in line with the tracker fund range.
We have examined BlackRock's stock lending programme and we believe that, on balance, investors benefit from taking part. The scheme rewards investors by reducing the funds' costs of management. We are satisfied by the controls in place to help reduce investor risk and investors are further protected by BlackRock's indemnity policy.
However, while the revenue from stock lending reduces costs it introduces an extra element of risk. Therefore cautious investors may prefer to invest in funds which do offer not stock lending.
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