Fund managers retain only 41 per cent of the total cost paid by retail investors, EFAMA finds
The European Fund and Asset Management Association (EFAMA) has today released its latest Market Insights report, Perspective on the costs of UCITS. The full report breaks down the costs of UCITS, focusing on the fees charged for the different services provided along the investment fund value chain and distinguishing between the product cost for which fund managers are directly responsible, and the total cost of ownership borne by consumers, which includes the product cost as well as the costs of distribution and advice.
This Market Insights report has been elaborated using data from Fitz Partners, a fund research company that specialises in the calculation of fees and expenses of cross-border funds domiciled in Luxembourg and Ireland. The report only covers funds whose distribution and advice costs are bundled in the fee paid by retail investors to fund managers before being retroceded to the fund distributors.
Bernard Delbecque, EFAMA Senior Director for Economics and Research says: “This report offers some insightful and relevant perspectives on the breakdown of costs between the main providers of services in the UCITS market. The fact that fund managers only retain on average 41 per cent of the total cost paid by retail investors means that the largest part of the cost of UCITS borne by investors is used to finance fund administration, depositary and other services, taxes, distribution and advice.”
The report finds that the simple average cost of ownership of actively managed cross-border UCITS offered to retail investors is currently 1.68 per cent, but this differs according to UCITS type: 1.96 per cent for equity funds, 1.34 per cent for bond funds and 1.76 per cent for multi-asset funds.
The report also finds that on average, 41 per cent of the fee charged by UCITS cover the expenses incurred by fund management companies in the area of product development and investment management.
The research showed a slightly lower proportion of the cost of ownership (38 per cent) is paid to distributors in compensation for the provision of advice and for acting as the intermediary for retail investors. There are cases where it is less than a third as well as cases where it is more than half of the total cost. The remaining 21 per cent covers administration services, depositary, taxes and other expenses.
The annual average product cost – one element of the cost of ownership – of an actively managed retail UCITS is 1.04 per cent.
The report states that index-tracking UCITS have, on average, lower costs than actively managed funds because tracking an index implies lower intervention by the fund manager. However, through retrocessions, distributors of index-tracking UCITS are paid the same percentage of the cost of ownership as from offering actively managed UCITS (38 per cent).
Finally, the report finds that an investment of EUR1,000 made at the end of 2009, in equal proportions, in an actively managed retail equity UCITS and an index-tracking equity UCITS has led, on average, to a net value of EUR2,530 after ten years. To benefit from this performance, the investor would only have paid EUR76 to the fund management company, EUR76 to the distributor and EUR43 to the other service providers, over ten years. To put these costs into perspective: a subscription to a typical digital music, podcast, and/or video service costs at least EUR9.99 per month, or EUR1,199 for ten years.
Tanguy van de Werve, EFAMA Director General says: “This report also shows that investment funds for which the costs of distribution and advice are bundled in the fee paid to fund managers are not necessarily more expensive than funds for which such costs are externalised. We therefore advise the Commission to exercise caution when considering possible changes to the existing EU distribution models and stress the necessity for a holistic assessment of all considered options.”