Investors around the world increasingly use regulated funds to help meet their financial goals, with assets in Ucits funds growing 46% in the past five years.
With that growth naturally comes increased attention to how funds work and scrutiny about how they serve investors. One area of particular interest has been fund fees and expenses, and this has been a long-time focus of ICI research in the US. More recently, we have expanded this to the EU and Ucits.
Our research shows the ongoing charges investors pay for Ucits funds are steadily falling. From 2013 to 2018, the asset-weighted average ongoing charge for equity Ucits funds fell from 1.49% of fund assets to 1.29%. For fixed-income Ucits funds, ongoing charges fell from 0.98% to 0.79%.
Investor demand for lower-cost Ucits funds is driving this trend. So is greater understanding of Ucits funds’ costs and economies of scale.
Regulatory changes have fostered more transparent disclosure, helping investors better understand fund distribution and costs. This is a very positive development, considering how distribution models are evolving.
For example, most American mutual fund investors today pay for distribution and advice outside of fund expense ratios.
ICI research shows that 71% of US mutual funds’ total net assets in 2018 were in share classes where payments for a financial professional’s services were separate from fund sales commissions. Additionally, the vast majority of net assets in these US share classes do not include distribution costs.
By contrast, Ucits funds retail investors predominantly pay for distribution and advice through ongoing charges in bundled share classes, which hold at least half of retail Ucits funds’ assets.
In recent years, we’ve seen an increase in sales of Ucits funds that unbundle the cost of advice, generally with lower ongoing charges. Assuming this shift continues, it’s likely that average ongoing charges of Ucits funds will continue to decline.
As funds grow larger, they can spread fixed costs across a larger base of assets. ICI research shows that at year-end 2018, the average size of a US mutual fund was €1.66 billion compared with €284 million for the average Ucits fund.
Given the scale of the average US mutual fund, it is not surprising that their average ongoing charges are lower than for Ucits funds – 0.55% for a US equity mutual fund compared with 1.29% for an equity Ucits fund.
Mutual funds’ prevalence in the US retirement savings system helps drive their scale; as more Europeans incorporate Ucits funds into their retirement savings strategy, this will help fund size and the market at large grow in the EU as well. Achieving similar scale in Europe requires action from EU policymakers. More cross-border Ucits funds would gain economies of scale by selling into, and gathering assets from, multiple countries.
In practice, these funds face regulatory hurdles that add cost and complexity to distribution and investment. It’s crucial that European policymakers reduce these barriers through meaningful progress on the Capital Markets Union. Doing so would benefit Europe’s investors, economies and citizens.
Paul Schott Stevens is president and CEO of the Investment Company Institute, the US-based association representing regulated funds globally
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