Luxembourg’s fund fees could decline as competitive pressures mount | Delano News

“If the market in Luxembourg has a significant increase in passive products, whether funds or ETFs, we would expect to see a steeper drop in fees there,” said Devin McCune, vice president of governance, risk and compliance services for Broadridge’s distribution insights business, in a statement to Paperjam. Photo: Broadridge

While the UK and US fund markets have experienced notable fee reductions of 44% and 32% in the last decade, Luxembourg’s fund fees have remained relatively stable, although there is potential for further declines as competition intensifies and regulatory changes emerge, said financial services company Broadridge.

Broadridge, a global financial services company, reported on key trends impacting fund markets in Europe and the US, with an emphasis on fee compression. The analysis, as a whitepaper on 17 October 2024, highlighted how regulation, the rise of clean share classes, the growth of passive investments and industry consolidation have transformed the financial landscape in the UK, Ireland, Luxembourg and the US.

Devin McCune, vice president of governance, risk and compliance services for Broadridge’s distribution insights business, told Paperjam that “Luxembourg has seen slower fee compression than Ireland or the UK.” He explained that “the first factor is industry concentration, which is the least pronounced in Luxembourg, with 38% of AUM held by the top 10 asset managers.” McCune added that a larger concentration of assets among the largest players leads to “greater economies of scale, which lower prices not only for products benefiting from these economies but also for competitor products that must reduce fees to stay competitive.” He also pointed out that “the relatively small portion of passive products in Luxembourg impacts the overall downward trend, as passive products are leading the overall decrease.” He concluded, “If the market in Luxembourg has a significant increase in passive products, whether funds or ETFs, we would expect to see a steeper drop in fees there.”

Over the last decade, the UK experienced the most significant fee changes, with passive fees dropping by 73% and active fees by 44%, placing them below those in Luxembourg. Ireland showed a notable difference between passive and active fees, with passive fees decreasing by 40% compared to a 15% drop for active management. Luxembourg had the smallest changes, with passive fees declining by 57% and active fees by 17%. Meanwhile, the US market, traditionally noted for having the lowest average fees, recorded a 32% decrease over the decade.

With the UK market showing the steepest cost declines and an active regulatory environment, it appears that products based in Luxembourg and Ireland have had to reduce their prices to stay competitive for UK investors, noted Broadridge. This suggests that the UK is influencing pricing strategies in these regions.

Broadridge emphasised on the pivot to passive investments from 2013 to 2023, revealing a substantial shift in assets from active mutual funds to passive products, with over half of the assets in both the US and Ireland now in passive products. The UK demonstrated a shift towards passive funds; however, ETFs domiciled in this market had yet to gain significant traction, while Luxembourg lagged in this transition.

Cumulative flow data from each region illustrated that, while capital continued to flow into active investments, passive investment flows were on the rise. The US experienced a marked increase in flows into passive exchange traded funds, with Ireland following a similar trend since 2017. The UK also saw substantial flows into passive products, while Luxembourg retained a preference for active mutual funds in 2023, albeit with a slight uptick in passive fund flows.

Despite the lower costs associated with passive management, the study noted a unique increase in assets under management (AUM) for alternative products in the US, which saw an 11% rise. This was attributed to active managers offering products that could not be easily replicated in ETFs and investors diversifying into assets unavailable in market-cap-based passives.

The report also addressed the concept of economies of scale in the funds industry, highlighting that larger asset managers generally achieved lower costs for consumers through greater product distribution, specialisation, fixed cost sharing and operational efficiency. However, the report acknowledged that economies of scale have limitations, such as diseconomies of scale and regulatory burdens that could offset some of the benefits.

The concentration of the market emerged as a significant factor, with the top ten asset managers in the US and Ireland holding substantial market shares, largely due to the dominance of passive assets. The top six firms in the UK, despite a shift in leadership, maintained a collective market share increase from 43% to 45%. In the US, the top ten firms accounted for 71% of fund assets, compared to 67% in Ireland, 56% in the UK and 42% in Luxembourg.

Broadridge concluded that while fees in the US and UK appeared to be nearing their lows due to extensive regulatory influences, Ireland and Luxembourg could potentially experience further reductions depending on forthcoming regulations.