Investors in Ucits investments funds like those based in Luxembourg are paying about 1/5 less in operational charges after a decade-long reduction in such fees, according to a report by the Washington DC-headquartered Investment Company Institute (ICI). The trend is accelerated by factors including the rise in lower-cost funds such as index trackers and the market exit of high-cost funds.
The ICI report, published on 19 October, focuses on a long-term reduction in charges affecting all investors in Ucits-compliant investments. It points to a 20 percent reduction since 2013 and said data showed costs continued to fall through 2022.
“Ucits investors are continuing to allocate more of their capital to low cost funds,” said Shane Worner, a senior economist at ICI, taking part in an Investment Officer interview. “There are many reasons for that, like that high cost funds are exiting the sector, but there’s also innovation in the industry as well through the development and promotion of lower cost funds, such as the passive index trackers, ETFs, etc.”
Products investors want
Worner added that in asset managers’ back offices, other cost innovations are driving down their operational costs. “I think asset managers are responding to investors tastes by developing products that investors want.”
Ucits continue to offer value to retail investors despite their attraction to the higher returns of alternative investments, explained James Duvall, an ICI economist.
“Retail investors might want to consider alternative investments as part of their portfolio, but Ucits provide a little more generality. An investor can use a Ucits to get access to the equity market more broadly without worrying about…substantial leverage or some other characteristics they they they may not understand. Ucits are a little easier to digest and with costs coming down, it just benefits those investors in making their choices about Ucits.”
Methodological questions
Another recent report by London-based Fitz Partners on investment fund ongoing charges broke out the cost performance of fund domiciles like Luxembourg. Fitz reported on a study analysing 40,000 fund share classes that Luxembourg-domiciled equity classes which increased their fees reported an average increase of 7 basis points, lower than overall average increase for all funds. At the same time, according to Fitz in institutional equity, those who decreased their fees did so by an average of 10 basis points, both across all funds and for Luxembourg-domiciled ones.
ICI told Investment Officer there are methodological problems with making such domicile-specific statements. “When we look at ongoing charges, we find it better to just look holistically,” said ICI›s Duvall.
He took the example of round trip funds, explaining that if a Luxembourg-registered fund is primarily sold in Germany, if ICI was to do a country-by-country analysis, “we would want to assign that to Germany, since that’s where it’s being sold.”
“Things like this get more complicated when you have funds that are market-registered and available for sale, in five, six or seven or more countries,” he said.
Because of such issues “we don’t do a by-domicile analysis because we don’t think it would be accurate to reflect what investors may have access to without the sales data that we just don’t have access to.” Duvall explained.
Raising questions
Any discussion of fund costs these days cannot exclude a consideration of the EU’s Retail Investment Strategy, which promoted the idea that high costs are a barrier to retail participation.
Victor van Hoorn, the Brussels-based managing director of ICI Global, explained that while ICI is “supportive of the policy objective of the Commission”, it feels it must add its voice to other market participants who are “expressing some question marks or maybe downright a certain level of scepticism about what is the problem they are trying to solve.”
One of the reasons for these doubts is the commission’s “value for money” approach, which manifests as cost benchmarks. The value-for-money approach replaced a proposed outright ban on inducements bundled with investment fees after a huge lobbying effort. Despite this background, Van Hoorn said “there’s a number of measures such as the cost benchmarks where I think you can wonder whether they’re absolutely necessary, or whether the data you see really justifies that kind of intervention.”
While debate over investment fund fee bundling rages, in the US and Canada, over the past three to four decades, retail investors have steadily moved away from bundled share classes and towards so-called no-load funds. It has reached a point where in 2021, only 16 percent of retail US mutual fund net assets were in bundled share classes.