A direct cost comparison between US mutual funds and Ucits is absent from the European Securities and Markets Authority (Esma)’s latest report on EU retail investment products, leading to criticism from the European Fund and Asset Management Association (Efama).
In its market report, Esma highlighted “substantial differences in the fund cost level between the EU and the US.” It argued that these cost discrepancies indicate market inefficiencies that need to be addressed to improve the competitiveness of EU markets within a future savings and investments union.
Efama, the voice of the European asset management industry, challenged Esma’s conclusions, stating that US mutual funds are not necessarily cheaper than Ucits. According to Efama’s research, while asset-weighted averages appear lower in the US, retail investors often pay similar or higher costs for actively managed mutual funds compared to Ucits.
According to Efama’s March 2024 Market Insights, the simple average product cost of actively managed Ucits equity funds at the end of 2022 was 1.04%, compared to 1.14% for US active mutual funds at the end of 2023. Similarly, passive Ucits ETFs had an average cost of 0.27%, while US index ETFs averaged 0.47%.
Efama report highlights active vs passive funds’ nuances
Efama also examined the cost of ownership for actively managed cross-border Ucits. Retail clients using advice-based distribution channels in 2020 faced a cost of ownership of 1.68%. Their analysis suggests that for long-term actively managed US funds to be more cost-effective, advisory fees in the US must be less than 0.59% per annum.
Efama acknowledged that asset-weighted average product cost of US mutual funds is lower – 0.65% for active funds and 0.05% for index mutual funds, but pointed out that this is largely because a significant portion of US mutual funds are held in retirement savings plans. The ICI Fact Book notes that nearly 50% of all mutual fund assets, totalling $11.9 trillion at the end of 2023, were in defined-contribution plans like 401(k)s and individual retirement accounts, it highlighted.
Retirement plans benefit from economies of scale, qualifying for institutional share classes with lower expense ratios than retail funds. Their size also allows for better fee negotiations, often leading to lower-cost options such as passive index funds. According to Efama, this underscores the need for a fair comparison of cost structures, ensuring that Ucits and US mutual funds are assessed in comparable contexts.
Tanguy van de Werve, director general, Efama, said: “It is often claimed that US mutual funds are consistently cheaper than Ucits, with their generally larger size cited as a key reason for cost differences. However, a more detailed analysis highlights the importance of comparing similar share classes and distinguishing between product costs and the total cost of ownership. This approach provides a more nuanced and accurate understanding of the situation and gives a very different picture.
