Europeans pay more for their investment funds than US investors, owing to higher distribution fees and other costs, according to a report by Lipper FMI, the funds research organisation.
Researchers Ed Moisson and Jonathan Kreider found that UK and European investors paid as much as twice what their American counterparts do to mutual fund distributors, which, they noted, significantly impacts on funds’ total expense ratios (TER).
They defined the TER as “the drag on fund performance caused by all annual operating expenses born by the fund, not just the annual management fee”.
For example, they found, cross-border equity funds in Europe typically carry distribution fees of around 70 basis points, while the equivalent share class in the US charges 25 to 35 basis points.
US funds, which tend to be larger than Europe’s and which do not have cross-border issues to deal with, are able to take advantage of economies of scale and price accordingly, the report, entitled Fund Expenses – a Transatlantic Study – noted.
At the end of June, some 1,700 fund groups across Europe were managing assets of $6.5trn, spread across some 35 domiciles, according to Moisson and Kreider; this compared with only 600 mutual fund companies in the US, with total AUM of $10.1trn.
What’s more, America’s three largest fund groups account for 32% of the assets held by US fund managers. Europe’s three largest fund groups manage only 12% of assets, the researchers noted.
Furthermore, in both the US and Europe, 80% of industry assets are managed by 4% of fund groups – though in the US this equates to 25 companies, while in Europe it is more than 70.
The higher costs are also evident in bond funds, where the US average TER is 0.83% compared with 0.88% in Germany, 1.2% in the UK, and 1.24% in the cross-border category.
Moisson, who is head of consulting at Lipper FMI, said fund companies “must balance the competing pressures of setting appropriate incentives to generate sales, while being sensitive to investors’ cost-consciousness, and justifying fee and expense levels to those overseeing a fund’s activities.”
TER% US Germany UK Cross Border
Equity funds, 1.32% 1.57% 1.66% 1.98%
Equity funds, 0.91% 1.44% 1.63% 1.89%
Bond funds, 0.83% 0.88% 1.20% 1.24%
Equity funds 1.33% 1.48% 1.60% 1.90%