Managers justify rising cost of cross-border funds

The costs of European cross-border funds are continuing to rise, according to a recent study by Lipper Fitzrovia. The asset-weighted-average Total Expense Ratios (TER) of an actively managed Luxembourg equity fund has increased by 13 per cent since 2001 and by 2 per cent since last year to reach 1.81 per cent in 2006. Results show that economies of scale achieved by cross-border funds are insufficient to overcome those greater costs resulting from additional market registrations. But this is only one of the reasons why the cross-border fund centres of Luxembourg and Ireland tend to have higher average TERs than other European fund jurisdictions. “A fairer reflection of what the fund is worth” is one justification given by fund managers for a rise in management fees. However, analysis conducted by Lipper shows that there is no conclusive evidence of a connection between higher TERs and better fund performance. Rising cost of distribution is seen by fund managers as the main cause of higher management fees, but lack of transparency in this area did not allow confirmation, said Lipper. However, recent research conducted by CRA International for the European Commission does show that distribution costs represent the largest share of costs in all member shares, with Italy and Spain leading the trend (see chart). Speakers at the Lipper Fitzrovia fee structure seminar considered European investors’ lack of awareness of fees and expenses a key factor determining the high cost of fund distribution. High expectations are placed on MiFID, the European directive which will oblige all distributors to disclose the level of distribution fees to the investors.

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