High fund fees in Europe under scrutiny

LUXEMBOURG Wed Mar 24, 2010 3:30pm EDT

1 of 2. Sanjiv Sawhney, Global Head of Funds Services of Citigroup, speaks during a Reuters European Funds Summit in Luxembourg March 23, 2010.

Credit: Reuters/Eric Vidal

LUXEMBOURG (Reuters) - Average fees for funds in Europe are too high and need to be brought more into line with lower charges paid by U.S. investors, speakers at the Reuters European Funds Summit said.

European funds umbrella group Efama estimates that investors are charged on average 1.8 percent for European equities funds, compared with only 0.8 percent for U.S. equities.

Sanjiv Sawhney, global head of fund services at Citi, said that the gap between Europe and the United States could at least be halved.

Noel Fessey, managing director of Schroders' investment business in Luxembourg, said that investors paying more than 1.5 percent were paying too much.

Part of the gap is explained by the fact that U.S. funds are in general larger than their European counterparts, where consolidation has been slow to arrive.

"One of the conundrums is that consolidation never seems to come. We've been talking about it for several years ... Asset managers continue to manage relatively small pools of assets and the customers pay accordingly," said Fessey.

"At the moment you have an industry that is extraordinarily fragmented."

He added the 7 trillion euro European industry could not support the present number of asset managers with lower fees.

However, this is one issue that new rules for EU-regulated UCITS funds, the European benchmark, should address.

The rules dubbed UCITS IV, to be implemented by July 2011, are designed to reduce costs by allowing asset managers to pool assets from several different markets in one vehicle

"Regulators are watching UCITS IV very carefully," said Efama President Jean-Baptiste de Franssu.

Some savings could indeed come from scale and with more functions, from the calculation of a fund's net asset value to the purchase of securities for a manager, being farmed out to growing service providers.

"A lot of this is driven by automated infrastructure," Sawhney said, whose company has $1.57 trillion assets under administration. "The model will keep getting more efficient."

A thorny issue is the commission paid to distributors. U.S. brokers typically receive an advisory fee on top of the fees of the fund, a charge included in European funds, making a direct comparison of fees unfair, according to some speakers.

A number of speakers at the Reuters Funds Summit and the concurrent spring conference at the Luxembourg Fund Industry Association (ALFI) said investors should know for what they are paying. Transparency and investor education were common buzzwords.

"What we're looking at the moment is to some degree a mirage," said Schroders' Fessey. "It's going to be difficult to deliver. Distributors are entitled to fair reward for what they do but the end-investor should know what's happening to their money."

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