Fund Expense Budgeting Balances Share Class Explosion

Fund Expense BudgetingFollowing the financial crisis, the asset management industry has seen its fair share of fund mergers and liquidations.

Typically asset managers merge funds to either tidy up when a group of funds has grown too large, often after they have acquired another group or when funds are too small and uneconomical to continue running. According to data gathered from Lipper, fund launches across Europe have remained quite constant and well below the pre-crisis levels. Launches, liquidations and fund mergers currently average around 450 to 500 funds per year, well below the average of 700 seen in the past.

So what has changed in today’s environment? The industry has seen an explosion in the number of share classes launched in Europe with total number of classes almost doubling to approximately 98,000 from a pre 2010 number of approximately 50,000 classes, according to Ignites Europe. This proliferation of share classes causes many issues–it is a problem for clients because of complexity and a problem for asset managers when it comes to both marketing and administration. We must remember though, that asset managers create additional share classes because it’s necessary. Clients want multiple access points and multiple price points, while cross-border players are dealing with different tax regimes.

With this reset in the market, a growing number of institutional investors across the UCITS and alternative investment space are closely scrutinising fund expenses and asking administrators and managers to provide monthly data on their underlying manager’s expenses. In fact, according to an article in Ignites Europe, the Financial Conduct Authority (FCA) will release a report next week with the results of an examination of product design and fund oversight that included fund expense management. There is the potential for “reputational damage” if unsound practices around expense management and expense allocation across share classes is found. Investors are becoming increasingly sensitive to fund expenses and management fees. There is an ongoing debate around the type of charges and fees that are passed onto the fund (e.g. fund research charges) and whether they should be, but beyond this, it is important to understand whether fund expenses are actively managed and how charges should be fairly allocated across classes.

Within the investment fund industry, there continues to be a lack of automation to help asset managers manage their budgeted expenses and in addition, fairly allocate expenses across their funds and share classes. Most back office operations continue to use spreadsheets, but with the explosion of share classes introduced to meet investor demand, there is a definite need for new technology that enables managers to reassess their investments. Automated solutions provide a systematic way to report on expense data that helps to appease both the regulators and auditors and provide investors with more confidence in the way that fund expenses are actively managed. In addition, automation allows managers to:

• Protect and manage margins through greater control and transparency
• Reduce the cumulative hours spent on fund expense oversight
• Eliminate spreadsheets and the errors contained therein, improving the control of your expense process
• Make product decisions around the fund and class offerings and manage revenue potential

As it appears there is no end in sight to the continued increase in share classes offered, it makes sense for asset managers to find ways to reduce the complexity of managing fund expense budgets and to allocate expenses fairly across share classes.

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