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Size, age, investment strategy and geography are key determinants of UCITS cost
Investment Funds

Size, age, investment strategy and geography are key determinants of UCITS cost

EFAMA’s latest research shows the average product cost of active and passive equity UCITS available to retail investors fell to 1.04% and 0.27% respectively in 2022
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12 MAR, 2024

By Jose Luis Palmer from RankiaPro Europe

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The European Fund and Asset Management Association (EFAMA) has released today a new issue of its Market Insights (MI) series titled “The cost of UCITS available to retail investors - key determinants based on clean share classes”.

Key findings

  • The simple average cost of clean share classes of equity and bond UCITS aimed at retail investors continued to decline in recent years. This trend can be ascribed to the surge in passive investing, increasing cost transparency, and advancements in technology driving down operational costs.
  • Fund size is a pivotal factor influencing costs. Larger share classes exhibit relatively lower average costs compared to smaller ones across all sub-categories. This is attributed to economies of scale enabling funds to spread fixed costs over a larger asset base. 
  • While the simple average cost of UCITS share classes proves to be lower than that of US mutual funds, the average asset-weighted cost of US mutual funds is significantly lower. This discrepancy can be attributed to the size and high degree of integration of the US mutual fund market that allow fund managers to leverage a sizable client base and achieve substantial economies of scale.
  • Newer share classes tend to incur lower costs. As they lack an established performance track record, newer funds often charge a lower fee to attract investors.
  • Beyond size, factors such as investment strategy and geographical focus also impact fund costs. Funds investing in specific asset classes or geographic regions may entail higher research costs.

Vera Jotanovic, Senior Economist at EFAMA, commented: “Our detailed analysis focusing on clean retail share classes shows that fund size is an important determinant of fund costs, and that newer funds tend to have lower costs. However, a variety of other factors have an impact and should be taken into consideration when evaluating fund costs.

Bernard Delbecque, Senior Director at EFAMA commented: “The report highlights that cost differences among various fund categories are small, particularly when compared to disparities in net returns. This observation carries two important implications: firstly, it confirms that cost alone should not dictate fund selection; and secondly, it emphasizes the potential benefits for retail investors in seeking financial advice to facilitate well-informed investment decision-making.”

Relation between the size and the cost

Graph showing the cost of equity and bonds funds, regarding to their size
Source: EFAMA Market Insights #15

The research carried out by EFEMA compares the evolution of the costs of investing in the op 25% retail clean shares classes (named as 'Big shares') with the costs of the other retail clean share classes (labeled as 'Small shares'). The research shows that big share classes exhibit smaller average costs than small share classes, economies of scale enables big fund to spread their fixed cost over a larger base. Regardless, averages provide an imperfect indication of the actual costs charged when investing in a small or a big fund. Also worth noting is that many small funds are cheaper than big funds.

Relation between the age and the cost of UCITS

The graph compares the cost of funds launched after de 1st of January 2021 and the bigger funds
Source: EFAMA Market Insights #15

The EFAMA's research tried to prove that newer fund have lower costs, as a strategy to attract investors and to counterbalance not having a track record to back them up. The research shows that costs related to retail clean share classes launched after the 1st of January 2021 are in line with the costs of the top-25% biggest share classes.

Relation between the cost of UCITS and their investment strategy

Comparison of the cost oof small-cap vs large-cap strategies and government bonds va corporate bonds
Source: EFAMA Market Insights #15

The report shows that the average cost of UCITS investing in large-cap companies is lower than those investing in small-cap companies. This result supports the size comparison, as large-cap funds tend to be bigger. Regarding the bonds universe, the report shows a slightly difference between funds which invest in corporate bonds and those investing in government bonds. This finding is somewhat surprising because the average size of government bond funds is significantly higher, and the management of corporate bond funds requires more research.

Relation between the cost of UCITS and their investment area

The graph compares the cost of the funds and the investment area, wether is global or not
Source: EFAMA Market Insights #15

EFEMA proved that active equity UCITS investing globally have almost the same cost as those of funds focusing on one country. On the other hand, passive equity funds investing globally are slightly more expensive than those of funds focusing on one country. In the bond funds universe, active and passive global bond UCITS are more expensive than funds investing in only one country.

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