Investors in European Ucits funds have seen a notable decrease in fees over the past few years. A study by Efama, the European fund industry’s umbrella organisation, suggests that these funds are now more cost-effective than many US mutual funds. Nonetheless, the largest US mutual funds continue to offer the lowest fees.
The average cost of active and passive mutual funds investing in equities and available to retail investors as Ucits funds fell to 1.04 percent and 0.27 percent respectively in 2022, Efama said. A similar study from 2020 put those rates at 1.19 percent and 0.36 percent.
The Efama study gave three explanations for the trend towards lower costs. The rise of passive investing, higher cost awareness among investors and technology that allows fund managers to operate more efficiently. “Automation and improved systems have helped lower operational costs, allowing fund managers to reduce fees without compromising on the quality of their services,” Efama said.
Fund managers have no choice but to reduce costs
The market share of ETFs and index funds has grown to 20 percent by 2022, compared to 9 percent in 2012. “As a result, many fund managers have no choice but to adjust their fees to remain competitive,” Efama said.
Investors, meanwhile, are also more aware of the impact of fees on the long-term returns of their investments. “With better access to information and greater (mandatory) cost transparency, investors are better able to compare different investment options. As a result, they are more likely to choose funds with lower costs, putting pressure on fund managers to further reduce the costs of their funds.”
Large US mutual funds still are cheaper
An actively managed US mutual fund had an average cost of 1.20 percent in 2020, fractionally above the costs for similar Ucits funds. However, when recalculated by fund size - with assets weighted - the average cost drops to 0.71 percent for active equity funds in the US, compared with a weighted average of 1.14 percent for European Ucits.
For passively managed index funds, the difference is also significant. US index mutual fund have 0.06 percent fees, compared to 0.30 percent for European retail Ucits funds. According to Efama, this shows that investors in the US fund market benefit from “a high degree of integration” that allows fund managers to take advantage of a “large client base” and “economies of scale.”
”Larger funds tend to have lower costs than smaller funds. This is the case because economies of scale allow funds to absorb their fixed costs over a larger asset base,” said Efama, adding that upcoming changes in the EU legal framework can be seen as conducive.
Deeper single market needed in EU
”To see Ucits grow in size, it would be necessary to further deepen the single market for Ucits. In this regard, the recent conclusion of the AIFMD/Ucits review represents an important premise.”
EU lawmakers recently completed a comprehensive review of the European legal framework for investment funds, as set out in the AIFMD and Ucits directives. The upgraded framework was adopted by the European Parliament in February. For the EU, however, there is still no single market for financial services, which means that investment fund offerings are also subject to national supervision and fragmentation.