Funds Hub
Money managers under the microscope
Envy, desire and basis points
I would like to tell you a story. It’s one about the tempestuous relationship between fund managers and their investors, a tale of envy, desire and basis point negotiations. You may have spotted by now that this is not the plot for this season’s latest blockbuster.
My story has recently gained a little extra spice with two old-fashioned heroes riding into view. One from the West – Omaha - and the other from the East - well, his father hailed from Russia – with both willing to make a little less money in order to help their fellow citizens. Warren Buffett and Stuart Rose are not alone; others in France and Germany are also saddling up. These horsemen seem to be heading in the opposite direction from those in the European funds industry.
There is one aspect that I’d like to look at to explore this: the fees generated by funds in relation to their assets. And in this case Europe and the US look pretty different.
One of the implicit benefits of investing in a mutual fund is that investors enjoy lower annual charges as a result of a fund’s success in increasing assets, in other words that costs fall as more investors join – economies of scale.
The following chart illustrates these economies of scale in action for funds sold across Europe. But although the disproportionately high expenses borne by the smallest funds does mean that average total expense ratios (TERs) fall as assets rise, crucially, such economies of scale do not continue through further asset rises among larger funds. View the chart by clicking here.
ECONOMIES OF SCALE
When comparing the UK to continental Europe there appears, at first, to be a different approach. But on closer scrutiny one can see that the apparent lack of economies of scale being passed on to investors largely reflect the fact that the smallest funds in the UK tend not to let expenses get out of control and create disproportionately high TERs.
