The Share You Still Own: Auditing Stock Lending Revenue in UK Funds

Stock lending rarely leads a fund’s marketing literature. It sits in the notes to the annual report, or in a short section of an ETF’s documentation, and it usually amounts to a handful of basis points. Yet in 2026, with UK investors attentive to every component of net return, that small line deserves a proper audit. The question is not whether stock lending is good or bad in principle. It is whether the revenue reaches the fund, whether the risks are properly collateralised and whether the disclosure gives a UK shareholder enough information to judge the trade-off.

Where the revenue comes from

A fund may lend the shares it holds to a borrower — typically a market maker, broker or hedge fund — for a fee. The borrower may need the stock to settle a trade or to maintain a short position. In return, the fund receives collateral and a lending fee. An agent lender usually runs the programme, arranging loans, monitoring collateral and handling recalls.

The revenue is real, but it is not earned in isolation. The agent takes a share. The fund may also bear operational and legal costs. What matters for investors is the net figure that accrues to the fund after those deductions, not the gross lending revenue that appears in a headline table. A programme generating £1 million gross is of limited comfort if the fund retains only a fraction of it.

The split is the first disclosure to read

UK fund annual reports should identify securities lending revenue and the split between the fund and the lending agent or manager. The precise presentation varies. Investment trusts may disclose lending income within a revenue note; authorised funds may show it in the notes to the financial statements; ETFs often summarise it in a securities lending section. The consistent point is that the fund’s share is the only part that benefits existing investors.

A 70/30 split in the fund’s favour is not automatically better than a 60/40 split if the latter comes with stronger collateral arrangements or a more credible indemnity. But the split is a starting point. It tells you who is being paid for the programme and whether the economics look aligned with shareholders. It is also worth checking whether lending revenue is treated as income or capital, and whether it is used to support a distribution. In an income fund, lending revenue can flatter a yield without being a durable source of dividends.

Collateral: quality, haircut and liquidity

Collateral is the first line of defence if a borrower fails. The fund should disclose what collateral it accepts, how it is valued and what haircuts apply. Cash collateral is common, but it brings reinvestment risk: the cash must be placed somewhere, and that placement can create liquidity and credit exposure. Non-cash collateral, such as government bonds or equities, brings market and currency risk. Neither form is risk-free simply because it is called collateral.

UK investors should look for the collateral policy rather than the reassurance. Is collateral marked to market daily? Are haircuts applied? Is it concentrated in a single issuer or currency? Can it be sold quickly in stressed conditions? The 2020 dash for cash is a useful historical reminder that collateral can become difficult to mobilise precisely when it is needed. An agent’s indemnity may offer protection against borrower default, but an indemnity is only as strong as the entity providing it. It should be read as a contractual backstop, not a guarantee.

Counterparty and governance risk

Borrower default is rare, but it is not zero. The fund’s disclosure should identify the counterparties or at least describe the eligibility criteria, the maturity of loans and the fund’s right to recall stock. Recall matters for stewardship: a fund cannot vote shares that are on loan unless it recalls them. For UK equity funds that make governance claims, lending policy should sit alongside voting policy, not outside it.

There is also a conflict question. If the lending agent is an affiliate of the fund manager, the revenue split and collateral terms deserve closer scrutiny. The programme should be governed by a written policy, reviewed by the board or authorised corporate director, and disclosed with enough consistency that investors can compare it year to year.

Reading the annual report without overreading it

The practical audit is straightforward. Find the securities lending note. Identify gross revenue, net revenue to the fund, the revenue split, collateral held, counterparties and any indemnity. Compare the net revenue with the fund’s net asset value. A few basis points is typical; a large figure may reflect a specialist strategy or hard-to-borrow holdings, but it may also invite questions about why the fund is lending so aggressively.

Then ask what the revenue costs in governance and risk terms. A small net benefit can still be sensible if collateral is conservative and disclosure is clear. A larger headline figure is less persuasive if the fund retains little of it, if collateral is opaque or if the programme sits awkwardly with the fund’s stated strategy. For a concentrated UK smaller-companies fund, lending stock in size may raise different questions from an index ETF lending liquid FTSE 100 constituents.

Stock lending is best treated as a return line with conditions attached. It can improve net returns modestly, and it can be run prudently. But it is not a free yield boost, and it should not be valued on gross revenue alone. The share you still own remains your economic exposure; the lending line simply tells you what the fund earns by allowing someone else to borrow it for a time. Read the split, read the collateral, and read the recall rights. That is the audit that matters.