industry news | Other areas of costing have been lowered to account for rise in fees
Offshore fund managers have upped their charges by a fifth, on average, over the past 10 years, squeezing the costs of fund service providers to keep overall costs lower.
The trick of lowering total expense ratios (TERs) while increasing fees worked until the last couple of years, since costs have come creeping back up as service providers ran out of margins to reduce.
The average management fee for actively managed equity funds in Dublin and Luxembourg has risen by 18% from 1.18% in 1993 to 1.39% in 2002, according to research by Fitzrovia International.
The research gave an analysis of fee trends of Dublin and Luxembourg-domiciled funds, and focused on three main asset classes of actively managed equity funds, bond funds and cash/short term funds. These together form around 80% of total net assets domiciled in two countries.
The research showed that average annual management fees are generally rising over 10 years. Equity funds average management fees are up by between 15% and 30%. Bond funds average management fees were up by between 4% and 24%.
For cash funds, however, average annual fees are falling. But, in contrast the largest cash funds have higher than average management fees.
Actively managed equity funds showed a rise in management fees of 18 basis points, indicating that it is not just new funds that are entering the market with higher fees, but also that previously launched funds have raised their fees.
The trend of rising management fees was seen regardless of fund size, with the largest funds also showing rising fees.
A clear trend for TERs was less discernable over 10 years, partly as a result of shifts in assets under management. However, for equity and bond funds, TERs have been rising for the past two to three years, mainly because the squeezing of service providers' fees have reached its limit.
Overall, the average TER has fallen by 80 basis points since 1992, and the average management fee has risen by 18 basis points over the same period.
The research indicated that there appears to be insufficient pressure to lower management fees, indeed the greater pressure would appear to be to compete for distribution and sales by raising management fees from which rebated fees for distribution are paid. European funds do not use the US practice of breakpoints or reducing management fee percentages as assets grow.
Underlining the increase in both fund assets and management fees since 1993, it is interesting to note that if management fees had not risen since 1993 but fund assets had still increased, fee revenues in 2002 would be over 30% lower. In other words, fee revenues in 2002 would be $2.1bn lower if fund companies had relied on growth in assets under management alone to increase their revenues over the past 10 years.
In 2002, total fee revenues for equity funds were $4bn, for bond funds they totalled $1.6bn and for cash funds they totalled $1.1bn.
Ed Moisson, author of the report, said: "The US practice of lowering management fees as assets under management grow is not used in Europe - employing such a practice would obviously have an impact on future fee trends."
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