Hedge-Fund Style Fees for Mutual Funds Face Crackdown in Europe
Hedge-Fund Style Fees for Mutual Funds Face Crackdown in Europe
(Bloomberg) --
As the war over fees rages in the asset management industry, European mutual funds have managed to retain a lucrative perk with their ability to mimic hedge funds’ fees. Now, regulators are clamping down.
Once the preserve of their more aggressive peers, many of the region’s mutual funds are charging investors if they beat their benchmarks -- often on top of a management cost. Some 5,000 funds holding almost 1.3 trillion euros ($1.4 trillion) of assets are doing so, with the average levy currently about 15%, according to Morningstar Inc. data.
At a time when asset managers are fighting for fees amid an investor exodus, European Union regulators want the charges to sink even further. An industry consultation that ended Oct. 31 addressed concerns that clients are facing steep costs from managers who pick convenient benchmarks that flatter their returns, along with inadequate disclosure.
“We need to bring down the relatively high costs of investment products offered,” Steven Maijoor, chair of the European Securities and Markets Authority, told lawmakers last week in Brussels. He cited recent ESMA findings that charges slashed investors’ gross returns by a quarter on average from 2015 to 2017, with retail clients paying more than institutional ones.
While ESMA isn’t planning to ban the fees altogether, it’s seeking to limit unwarranted costs being charged to investors. The proposed new guidelines seek consistent standards across the EU, simple disclosures about when the fees are levied, and for benchmarks to be more appropriate to the fund’s investment goals.
“Some funds talk in a lot of jargon and the average investor might not understand exactly how that fee is calculated and what they are likely to pay,” said Laura Suter, an analyst at AJ Bell Plc, a Manchester-based investment platform overseeing 52 billion pounds ($67 billion). Performance charges “need to be implemented in the right way.”
ESMA is trying to encourage more retail investors to participate in equity and bond markets as part of a broader effort to develop bigger capital markets in the region. It aims to finalize its fee guidelines in the coming months.
Industry Defiance
The industry’s biggest lobbying groups are pushing back. They say the levies provide an extra incentive for managers to beat benchmarks in addition to the typical management fees on almost all funds.
“We see these as a tool to continually better align their economic incentives with those of the end investors,” Federico Cupelli, senior regulatory policy adviser at European Fund and Asset Management Association, said in a phone interview.
EFAMA, along with the Investment Association, the London-based lobbying group for managers overseeing 7.7 trillion pounds and the Association of the Luxembourg Fund Industry, defended the fees in letters to regulators last month. Industry responses to the ESMA consultation were published last week.
Amundi SA, Europe’s largest money manager, said it welcomed standardization of the charges but believes that firms should retain the ability to set their own performance fees.
“As much flexibility as possible should be left to asset managers in designing what in their views is the most effective pricing policy to win a client,” Amundi said in its response. Excessive standardization will “have the unwanted effect to remove an area of competition reducing the range of choice available to investors.”
To contact the reporters on this story: Lucca de Paoli in London at gdepaoli1@bloomberg.net;Silla Brush in London at sbrush@bloomberg.net
To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Chris Bourke, Ambereen Choudhury
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