Lipper Survey Shows Disquiet About Fund Fees

by Carla Johnson, Investors Offshore.com

14 July 2006

A survey by leading investment fund research company Lipper Fitzrovia of Chief Financial and Operating Officers of major asset management groups has shown that there is much dissatisfaction with the level and structuring of fund fees.

Requirements to disclose Total Expense Ratios (TERs) by national regulators around Europe, the EC Green Paper on the Enhancement of the EU Framework for Investment Funds covering related fee issues, and tougher market conditions are combining to push fee and expense issues to the forefront, says Lipper.

Among respondents to the survey:

• 77% said transparency for annual distribution fees needs improving;
• 51% said initial charges would disappear in Europe;
• 65% said fund of fund fees were too expensive;
• 87% said performance fees would become more popular for long-only funds.

Fund companies often refer to the cost of distribution as a reason for rises in management fees: any reduction in initial charges will only increase pressure on annual management fees; funds of funds remain under pressure to explain their fee structures; and the rise in the use of performance fees for long-only funds might indicate the growing acceptance of hedge fund fee levels.

Consequently, says Lipper, more fund companies will be looking to explain their policy on fees. For example, passively-managed funds are under pressure to track their indices more closely by cutting TERs. Also, small funds can have problems when anticipated sales do not materialise, resulting in disproportionately large TERs.

Ed Moisson, Director of Lipper Fitzrovia’s European Fiduciary Operations, speaking at the Fund Forum in Monaco, said: “Fund companies are already going beyond TER disclosure and actively justifying their funds’ expense levels, comparing their funds to their peers. This in turn could move to a greater emphasis on “value” and not just a fund’s pure cost - linking expenses to other factors such as performance, risk and service.

“The focus on areas such as fee justification and “value” are likely to be further strengthened by an increasing emphasis on fund governance over the next five years or so, partly as a result of the UCITS Management Directive, which requires more structured oversight of funds.”

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