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ARCHIVE
Fund Investors’ Expenses Are Falling on Both Sides of the Pond
By Shelly Antoniewicz, James Duvall, and Giles Swan
March 24, 2021
Data on UCITS ongoing charges have become more widely available to investors in recent years. Enhancements to costs and charges disclosures that UCITS and distributors make available to investors have provided them with a wealth of beneficial information, which we believe can be further enhanced. Additionally, aggregate statistical summary information about UCITS ongoing charges is now more widely available. The European Securities and Markets Authority (ESMA) began releasing an annual publication on UCITS ongoing charges in 2019, and likewise, ICI began an annual review of UCITS fees in the same year. We’ve also seen heightened scrutiny of ongoing charges, and since we began publishing research on the ongoing charges of UCITS—following our decades of research on the expense ratios of US-registered mutual funds—we’ve frequently heard two misperceptions when UCITS ongoing charges are compared with US-registered mutual fund expense ratios.
- Misperception #1: Declines in UCITS ongoing charges are “too small.”
This statement fails to recognize that the annual rate of decline has been similar for both ongoing charges of UCITS and expense ratios of US mutual funds, and that small annual changes can accumulate to meaningful changes over time. - Misperception #2: UCITS ongoing charges are “too high.”
This statement fails to recognize important differences between UCITS and US mutual funds in payments for distribution and advice, economies of scale, and use of index funds.
These misunderstandings often result from an apples-to-pears comparison of the decline in average ongoing charges between UCITS and US-registered mutual funds. Data availability challenges and 2011 regulatory changes haven’t helped in this regard. Meanwhile, average expense ratios for US mutual funds have been readily available for the past 25 years. However, this gap is no excuse to misconstrue what the data tell us—that the declines in UCITS ongoing charges are similar to those for US-registered mutual funds.
Figure 1 compares changes in UCITS ongoing charges with changes in US mutual fund expense ratios between 2014 and 2019 for both equity and fixed-income funds. For equity funds, we can see that UCITS and US mutual funds have experienced similar annual declines in ongoing charges. Over this period, the average rate of decline for equity UCITS ongoing charges was 4.2 basis points per year compared with an average rate of decline of 3.8 basis points per year for equity US mutual funds. For fixed-income funds, the average rate of decline for UCITS ongoing charges was 3.3 basis points per year from 2014 to 2019 compared with an average annual rate of decline of 2.5 basis points for US mutual funds.
Figure 1
EU and US Equity Funds Experience Similar Annual Changes in Ongoing Charges
Annual change in the UCITS ongoing charge and the US mutual fund expense ratio, basis points
Note: Data exclude exchange-traded funds and funds that invest primarily in other funds.
Source: Investment Company Institute tabulations of Morningstar data
“Small” annual changes can accumulate to a meaningful reduction in ongoing charges.
Some commentators state that these declines are simply too small and have no substantial impact. But such a statement overlooks that these “small” changes add up over time and would result in a meaningful decline in UCITS ongoing charges. Consider the US historical experience as an example. From 1996 to 2019, the average annual rate of decline in equity US mutual fund expense ratios was 2.3 basis points, which might be considered “small” when viewed in isolation. But over the entire period, the asset-weighted expense ratio of equity US mutual funds declined a total of 51 percent. Even over the shorter span in our analysis of UCITS ongoing charges (2013 to 2019), these “small” annual declines have accumulated, with equity UCITS ongoing charges falling 17 percent and fixed-income UCITS ongoing charges dropping 20 percent. As the UCITS industry continues to mature, one would expect, all else being equal, that this will continue and result in a substantial decrease in average ongoing charges.
So, what about the misperception that UCITS ongoing charges are “too high?” It’s certainly true that asset-weighted average ongoing charges for UCITS are higher than asset-weighted average expense ratios for US mutual funds. For example, in 2019, the asset-weighted average ongoing charge for an equity UCITS fund was 1.24 percent compared with an asset-weighted average expense ratio of 0.51 percent for a US-registered equity mutual fund. Nevertheless, this does not mean that UCITS ongoing charges are “too high” when compared to US mutual funds. There are some key reasons that account for the difference in average ongoing costs between the two regions:
- different models for payments of distribution and advice;
- economies of scale; and
- share of assets in index funds.
Payments for distribution and advice have largely been externalized for US mutual funds.
Over a period of three to four decades, US mutual fund investors have increasingly chosen to pay for distribution and advice externally (out of pocket) rather than through the fees and expenses charged by the fund. Seventy-two percent of US mutual funds’ total net assets at year-end 2019 were in “no-load” share classes, where any payments for the services of a financial professional largely occur outside of the fund. Some of these no-load share classes may include a 12b-1 fee—part of which may pay for the cost of distribution—but the vast majority of net assets in no-load share classes in the United States have no 12b-1 fee.
By contrast, UCITS retail investors predominantly pay for distribution and advice internally or through ongoing charges that bundle the cost. In 2019, at least half of the net assets in retail UCITS share classes were in bundled share classes. In recent years, in response to regulatory developments and market demand, UCITS have increasingly made available retail share classes that unbundle the cost of advice. These unbundled share classes generally have lower ongoing charges than bundled share classes. If retail UCITS investors continue to shift toward unbundled share classes, one would expect, all else being equal, that average ongoing charges of UCITS should continue to decline.
In the interim, regulatory changes, including MiFID II, have fostered simpler and more transparent disclosure of costs and charges. We have supported EU policymakers in continuing to discuss how they can improve investors’ understanding of what distribution costs encompass and how they pay for them. This is an important dialogue, as there is no one-size-fits-all model covering fund distribution and financial advice charges—neither in the European Union nor in the United States. Ensuring that fee disclosures are as easy to understand as possible empowers investors to choose the payment method that is best suited for them. Greater transparency around costs also fosters competition, which tends to push charges downward.
On average, US mutual funds are larger than UCITS.
Economies of scale, driven by fund size, are another key factor that influence ongoing costs for funds. At year-end 2019, the average US mutual fund had €2,078 million in net assets compared with €309 million for an average UCITS fund (Figure 2). Some fund costs—such as transfer agency fees, accounting and audit fees, and depository fees—are relatively fixed. As a result, they contribute proportionately less to a fund’s total ongoing costs as the fund grows.
Figure 2
Economies of Scale Matter: US Mutual Funds Were About Six Times Larger Than UCITS in 2019
Average fund size in millions of euros, year-end
Note: Data exclude exchange-traded funds, funds that invest primarily in other funds, and money market funds.
Sources: Investment Company Institute and Morningstar Direct
Given the scale of the average US mutual fund, it is not surprising that their average expense ratios are lower than the average ongoing charges of UCITS. The retirement system in the United States provides a channel for mutual funds to achieve such scale. About half of the assets in defined contribution plans and individual retirement accounts—about $9.9 trillion—were invested in US mutual funds at year-end 2019.
Index tracking funds are a larger share of the US mutual fund market.
In the past decade, US investors have increasingly gravitated toward using index tracking funds. At year-end 2019, US index tracking mutual funds were 24.2 percent of total mutual fund net assets compared with 6.5 percent for index tracking UCITS (Figure 3). Why does this matter? Index tracking funds tend to have below-average ongoing charges because their general approach to replicating the return on a target index lends itself to being less costly, and because they are more likely to be sold “unbundled” from advice and distribution charges.
Figure 3
Index Tracking Funds Have a Larger Presence in the United States
Percentage of total US mutual fund or UCITS net assets, year-end
Note: Data exclude exchange-traded funds, funds that invest primarily in other funds, and money market funds.
Sources: Investment Company Institute and Morningstar Direct
The US mutual fund and UCITS markets are different, and it is necessary to consider the unique aspects of each market when comparing the asset-weighted average ongoing charges between them. Importantly, asset-weighted average UCITS ongoing charges have steadily decreased since 2013 as the distribution and regulatory landscape has evolved and UCITS investors have gravitated toward lower cost products.
Shelly Antoniewicz is senior director of industry and financial analysis and James Duvall is an economist in ICI Research; Giles Swan is director of global funds policy at ICI Global.
Permalink: https://www.ici.org/viewpoints/21_view_ucits_fees
TOPICS: Equity InvestingEuropeFund RegulationICI GlobalInternationalShareholder
Value Is in the Eye of the UCITS Holder
By Giles Swan
December 3, 2020
ICI research shows a steady decline in the cost of UCITS investing. European regulators are looking beyond just declining cost, however, by requiring UCITS managers to justify the value of these funds to investors. But how do investors assess value relative to cost, and what is the role of regulators?
TOPICS: Equity InvestingEuropeFund RegulationICI GlobalInternationalShareholder
A New Benchmark for Distribution Oversight
By Ahmed Elghazaly
July 21, 2020
On June 1, the fund industry achieved a milestone for global cooperation. In an industry-led agreement, fund distributors and fund managers of Undertakings for the Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs) joined together to issue a common protocol for distribution oversight.
TOPICS: EuropeFund GovernanceFund RegulationGlobalICI GlobalInternationalOperations and TechnologyShareholder
Simulating a Crisis
By Sean Collins
August 15, 2017
The Bank of England (BoE) recently published a paper detailing results from a simulation intended to “stress-test” open-end investment funds. The paper suggests that under “severe but plausible” assumptions, investors could redeem so heavily from open-end investment funds (e.g., mutual funds or UCITS funds) during a period of market stress that they could cause “dislocations” in corporate bond markets.
TOPICS: Bond FundEuropeFinancial MarketsFinancial StabilityFixed IncomeFund RegulationGlobalInternationalMutual FundPolicy Research
What's the “Exposure” of Money Market Funds to Europe?
By Sean Collins
January 26, 2017
At the American Economic Association (AEA) meetings in Chicago early this month, speakers and attendees at several sessions asked: do money market funds pose systemic risks?
TOPICS: EuropeFederal ReserveFinancial MarketsFinancial StabilityFund RegulationInternationalMoney Market FundsMutual Fund
Matching Models to Reality: Doomsayers Are Disappointed—Again—as Funds Weather Brexit Shock
By Paul Schott Stevens
July 13, 2016
On Thursday, June 23, the electorate of the United Kingdom voted in a referendum on the country’s membership in the European Union. The result—51.9 percent in favor of “Brexit,” 48.1 percent in favor of “Remain”—went against pollsters’ and pundits’ expectations and surprised the world.
TOPICS: Bond FundEuropeFinancial MarketsFinancial StabilityFund RegulationICI GlobalInternationalMutual Fund
When Investor Protection Becomes Protectionism
By Patrice Bergé-Vincent
June 14, 2016
Today, Europe is facing two related needs: to provide its citizens with efficient, lower-cost vehicles for savings and investment, and to bolster economic growth.
TOPICS: EuropeFinancial MarketsFund RegulationICI GlobalInternationalMutual FundTaxes
Conducting Business in a Rapidly Changing World
By Jeanne Arnold
June 1, 2016
The global operating environment is evolving and it is critical for corporations to understand the changes afoot if they are to succeed in the 21st century, said Kevin Kajiwara, co-president of Teneo Intelligence, a division of global advisory firm Teneo. Speaking on the final day at ICI’s 58th General Membership Meeting (GMM), Kajiwara gave an overview of the economic and political shifts taking place around the world during his session, “Geopolitical Risks and the Global Economy.” After the overview, he engaged in an insightful question-and-answer session with Tom Faust, chairman and CEO of Eaton Vance Corp.
TOPICS: EuropeGMMInternationalMutual FundTrading
Derivatives—Please Don’t Let Them Be Misunderstood
By Shelly Antoniewicz
February 22, 2016
Derivatives are important portfolio management tools that provide funds with many potential benefits, including the ability to:
- hedge risk;
- enhance liquidity, because derivatives can be more liquid than traditional physical securities;
- gain or reduce exposure to unique markets or to asset classes when access through other instruments is difficult, costly, or impossible;
- manage or equitize cash; and
- reduce cost.
TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationInternationalMutual Fund
U.S. and European Fund Investors Continue to Take Long View on EM Economies
By Chris Plantier
February 12, 2016
In an ICI Global Research Perspective last year, we showed that U.S. and European registered funds held $1.7 trillion in emerging market (EM) stocks and bonds at the end of 2014 (this total counts Hong Kong, Singapore, South Korea, and Taiwan as emerging markets). Of that, $1.27 trillion was estimated to be in equities and $431 billion was in bonds. We also showed that this $1.7 trillion was spread widely, across 80 different EM countries, and that fund net purchases of EM securities explained little of the variability of capital flow to EM countries.
TOPICS: Bond FundEuropeFinancial MarketsICI GlobalInternationalMutual Fund
Traders, Start Your Engines: After August 24, Exchanges Need to Coordinate
By Jennifer Choi and George Gilbert
November 30, 2015
The extraordinary volatility in U.S. equity markets on August 24, 2015, exposed a significant deficiency in the rules governing these markets’ structure: a lack of harmonization across securities exchanges for reopening trading after a “limit up–limit down” trading halt in a security.
TOPICS: Equity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund Regulation
U.S. Bond ETFs Resilient on August 24
By Shelly Antoniewicz
November 20, 2015
Some observers have suggested that equity market volatility on August 24, 2015, spilled over into other markets and products, in particular to bond exchange-traded funds (see, for example, Bank of England Financial Stability Paper, no. 34, October 2015, pages 26 and 27). In our analysis of the events of that morning, we conclude that U.S. bond ETFs were resilient and largely immune to the turmoil in the equity markets.
TOPICS: Bond FundBondsEquity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund Regulation
New York Times Paints False Picture of Funds’ Emerging Market Investments
By Mike McNamee
August 24, 2015
With the global market turmoil over the past week, it’s no surprise that journalists are looking for hot stories of panic, investor flight, and impending crisis. Either they believe that investors are inherently flighty and panic-prone, or they believe that “this time is different” and investors who have not panicked before will panic now.
TOPICS: Bond FundBondsEquity InvestingEuropeFinancial MarketsFinancial StabilityFixed IncomeICI GlobalInternationalMutual Fund
The IMF on Asset Management: Handle Empirical Results with Care
By Chris Plantier
July 15, 2015
In this ICI Viewpoints series, we’ve examined the wide range of data errors, inconsistencies, results that don’t bear statistical scrutiny, and misinterpretations in the International Monetary Fund’s most recent Global Financial Stability Report (GFSR)—specifically, the chapter on “The Asset Management Industry and Financial Stability.” Those problems primarily involved poor understanding of funds and their investors. We didn’t need advanced statistical methods to uncover them.
TOPICS: EuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury
The IMF on Asset Management: Sorting the Retail and Institutional Investor “Herds”
By Sean Collins
June 4, 2015
Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.
In this ICI Viewpoints series, we’re examining the wide range of data errors, inconsistencies, results that don’t bear statistical scrutiny, and misinterpretations in the International Monetary Fund’s April 2015 Global Financial Stability Report (GFSR)—specifically, the chapter on “The Asset Management Industry and Financial Stability.” These problems undercut the IMF’s conclusion that “Even simple investment funds such as mutual funds can pose financial stability risks.”
TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundPolicy Research
The IMF on Asset Management: Which Herd to Follow?
By Sean Collins
June 1, 2015
Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.
In April 2015, the International Monetary Fund (IMF) published its most recent Global Financial Stability Report (GFSR), which included a chapter titled, “The Asset Management Industry and Financial Stability.”
We have heard suggestions from more than one observer that the IMF’s GFSR Chapter on asset management provides a wealth of charts, tables, and data to support regulators’ case that regulated funds or asset managers could pose systemic risks.
TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundPolicy Research
The IMF on Asset Management: The Perils of Inexperience
By Sean Collins
May 28, 2015
Part of a series of ICI Viewpoints about problems in the IMF’s analysis of the asset management industry.
In April, the International Monetary Fund (IMF) released its most recent Global Financial Stability Report (GFSR), including a chapter on “The Asset Management Industry and Financial Stability.”
TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundPolicy Research
SEC Chair White Affirms Agency Has Tools to Address Risks in Industry
By Rachel McTague
May 8, 2015
The U.S. Securities and Exchange Commission (SEC) has the tools it needs to address systemic risks to the extent they exist in the asset management industry, said SEC Chair Mary Jo White at the opening session on the final day of ICI’s annual General Membership Meeting (GMM). White also announced that David Grim—who had been serving as acting director of the SEC’s Division of Investment Management—has just been named director of the division. White said she is thrilled that Grim, a 20-year veteran of the SEC in the investment management area, is taking the reins at a time when the Commission is moving forward to implement proactive regulations for the industry.
TOPICS: BondsCybersecurityEuropeEventsExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityFund RegulationGMMGovernment AffairsInterest RateInternationalMutual FundShareholderTreasury
The IMF Quietly Changes Its Data, but Not Its Views
By Chris Plantier
April 21, 2015
On Friday, April 10, we pointed out that the International Monetary Fund (IMF) apparently had vastly overstated the size and growth of bond fund holdings of emerging market bonds in its latest Global Financial Stability Report (GFSR).
TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury
Federal Reserve Reverse Repo Facility Helps Stabilize Short-Term Money Markets
By Chris Plantier
April 17, 2015
Following a pattern observed at the end of recent quarters, money market fund holdings of European issuers dropped at the end of March, although the decline was not as large as the previous quarter, ending December 2014. As we have noted before, for regulatory reasons European banks have been paring their balance sheets at the end of each quarter, resulting in a temporary decline in their desire to borrow from money market funds.
TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
The IMF Is Entitled to Its Opinion, but Not to Its Own Facts
By Sean Collins and Chris Plantier
April 10, 2015
On Wednesday, the International Monetary Fund released its latest Global Financial Stability Report (GFSR), including a chapter on the asset management industry and financial stability.
TOPICS: EuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury
European Banks Borrow Less from MMFs; the Federal Reserve Borrows More
By Chris Plantier
January 20, 2015
As we discussed in April and July of last year, due to regulatory pressures European banks generally have become less willing to borrow from U.S. money market funds (MMFs), especially at the end of the quarter. This quarter-end effect was particularly large at the end of December 2014.
TOPICS: EuropeFederal ReserveMoney Market FundsTreasury
The IMF Makes All of OFR’s Mistakes—And More
By Sean Collins and Chris Plantier
October 10, 2014
The International Monetary Fund (IMF) just released its latest Global Financial Stability Report. In the immortal words of Yogi Berra, it is déjà vu all over again.
The IMF report bears more than a passing resemblance to Asset Management and Financial Stability, published by the U.S. Treasury Department’s Office of Financial Research (OFR) in September 2013. The OFR report was met with widespread criticism for its misinformed discussion of hypothetical “vulnerabilities” posed by mutual funds and other asset managers.
TOPICS: EuropeFinancial StabilityFund RegulationICI GlobalInternationalMutual FundTreasury
Why Regulated Funds Are a Relatively Stable Source of Foreign Investment for Emerging Economies
By Chris Plantier
September 26, 2014
The press and policymakers focus a great deal of attention on flows to U.S. and European regulated mutual funds and exchange-traded funds (ETFs), in part because these funds are perhaps the most easily observed and readily measured players in capital markets.
TOPICS: EuropeFinancial MarketsFinancial StabilityFund RegulationICI GlobalInternationalMutual Fund
“Preemptive Runs” and Money Market Fund Gates and Fees: Theory Meets Practice
By Sean Collins and Chris Plantier
August 20, 2014
A recent post on the blog of the Federal Reserve Bank of New York discusses the possibility that new rules by the Securities and Exchange Commission (SEC) allowing money market funds to temporarily impose fees or gates during times of market instability could increase the risk of preemptive runs on such funds during times of stress, rather than helping to limit destabilizing withdrawals, as the SEC intended.
TOPICS: EuropeFederal ReserveFinancial StabilityFund GovernanceFund RegulationGovernment AffairsInternationalMoney Market FundsTreasury
Sizing Up Mutual Fund and ETF Investment in Emerging Markets
By Chris Plantier
August 18, 2014
In coming decades, emerging market (EM) economies will need substantial new capital to accompany and sustain their rapid growth.
TOPICS: Bond FundBondsEquity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationICI GlobalInternationalMutual Fund
European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June
By Chris Plantier
July 18, 2014
As we discussed in March and April, European banks have generally become less willing to borrow from U.S. money market funds due to regulatory pressures, especially at the end of the quarter. Specifically, the new Basel III requirements seek to increase capital ratios of banks and explicitly limit how much banks fund their operations through short-term borrowing (which includes short-term securities banks issue that money market funds invest in). This quarter-end effect was particularly strong at the end of June as European bank regulators continued to monitor bank progress toward meeting the new Basel III requirements, which will be fully phased in over the next few years.
TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
Seasonality, U.S. Money Market Funds, and the Borrower of Last Resort
By Chris Plantier
April 16, 2014
The March money market fund holdings data indicate a large drop in the share of fund assets allocated to European counterparties and a large increase in the share of fund assets allocated to U.S. counterparties. This shift is likely temporary and reflects reduced willingness of European banks to borrow from money market funds at the end of the quarter, rather than reduced demand from money market funds. Also, the increase in lending to U.S. counterparties is almost entirely due to the large increase in money market fund lending to the Federal Reserve via its overnight reverse-repo (repurchase agreement) facility.
TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
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