Fee & Expense Analysis of European Cross-Border Funds

Fee & Expense Analysis of European Cross-Border Funds Lipper Fitzrovia http://www.lipperfi tzrovia.com Global Fiduciary Review

Fee & Expense Analysis of European Cross-Border Funds In this first report of its kind, we find that: Average Total Expense Ratios (TERs) for cross-border equity funds rise in line with the number of market registrations The average fund size for different numbers of market registrations does not correlate to higher or lower average TERs For bond and cash funds, the correlation between increasing the number of European markets for sale and TER averages is not so clear For round-trip funds, annual expenses vary greatly depending on the market into which they are sold There are wide differences in TER averages between cross-border fund promoters; promoters average TERs range from 1.21% to 2.93% Contents Introduction...2 1. Asset Class Comparisons 1.1 Actively managed equity funds...3 1.2 Bonds funds...7 1.3 Cash/short-term funds...9 2. True Cross-Border Funds 2.1 Mainstream investment areas...10 2.2 Asset ranges...11 3. Fund Promoters TER Averages...12 4. Round-Trip Funds...15 5. Conclusions...16 6. Methodology...18 This report was produced by: Ed Moisson, Director of European Fiduciary Operations, ed.moisson@reuters.com Benoit Pistre, Fiduciary Analyst, benoit.pistre@reuters.com Reuters 2006. All Rights Reserved. Lipper FundIndustry Insight Reports are for informational purposes only, and do not constitute investment advice or an offer to sell or the solicitation of an offer to buy any security of any entity in any jurisdiction. No guarantee is made that the information in this report is accurate or complete and no warranties are made with regard to the results to be obtained from its use. In addition, Lipper will not be liable for any loss or damage resulting from information obtained from Lipper or any of its affiliates. Leading Fund Intelligence 1

Introduction Context This report focuses on the impact of collective funds European cross-border activities on annual fees and expenses. It assesses the link between the number of jurisdictions into which a fund is registered for sale and its Total Expense Ratio (TER). We intend to shed light on whether additional expenses related to operating and marketing funds cross-border are offset by the attraction of additional assets. Over the longer term, with the possible emergence of a truly integrated single European fund market, the dynamics that impact on our findings will continue to have implications for investors. It is not the aim of this analysis to suggest that the number of market registrations is the only factor, or possibly even the primary factor, determining the annual fee and expense levels for European funds. Factors such as a fund promoter s pricing policy and the level of assets under management are obviously crucial in determining a fund s TER, and these will be referred to in the report. Our Approach For the purpose of this study we have analysed funds TERs for the nine main European markets: Austria, Belgium, France, Germany, Italy, Spain, Sweden, Switzerland and the UK. Ireland and Luxembourg are included in this study as domiciles of cross-border funds rather than as markets into which funds are sold. Domiciled and non-domiciled funds authorised for sale in the above listed markets are included. We have divided this funds universe between: All cross-border funds - registered for sale in at least one European market other than their country of domiciliation. True cross-border funds - registered for sale in at least three European markets other than their country of domiciliation i.e. distributed in at least four jurisdictions. (This is a subset of the first group). Round-trip funds - funds registered for sale exclusively in the promoter s home-market, but domiciled elsewhere. (This is a subset of the first group). In the first section, we examine TER averages for the principal asset classes. In the second section, we look more closely at the true cross-border funds by restricting this universe to a more homogenous fund sample - looking at mainstream investment areas and specific asset ranges. Cross-border fund promoters TER averages are produced in section three. We then focus on the average TERs for round-trip funds. Finally, we offer some conclusions. For more details on the methodology used for this report and for our TER calculations, please refer to section six. Leading Fund Intelligence 2

1 Asset Class Comparisons Fee and expense differences between types of cross-border funds can only be suitably analysed at asset class level. In order to have meaningful samples for comparisons, we primarily focused on the main asset classes: actively managed equity funds, bond funds, as well as cash/short term funds. The actual size of a fund can be a crucial factor affecting the level of TER in light of potential economies of scale; therefore both simple (straight mean) and asset-weighted averages are used. Please note that the figures in the tables below and throughout the report may not appear to add up due to roundings. Also, throughout this report we have excluded performance fees achieved from the average TERs shown, but these have been included as a separate figure, for completeness. 1.1 Actively managed equity funds Actively managed equity funds registered for sale in at least three markets have a simple average TER of 1.93%; 3 basis points lower than for all cross-border funds (see Table 1). Asset-weighted average TERs are lower than simple average TERs across all three categories (all cross-border funds, true cross-border funds and round-trip funds). As the fixed non-management expenses are spread over larger fund volumes, the overall weight of expenses is less significant in relative terms, thus achieving economies of scale. Using asset-weighted figures, the true cross-border average TER for actively managed equity funds decreases to 1.79%. In the same way, the entire cross-border universe average TER declines to 1.70%. The TER reduction between simple average and asset-weighted average is more significant for the entire cross-border market a decrease in TER of 13% against a decrease of only 7% for true cross-border funds. Round-trip funds have the highest average TER but show the largest reduction between simple and asset-weighted averages - a 20% decrease. This group is useful to bear in mind as a subset of all cross-border funds, however, the particular market into which round-trip funds are sold will impact on the TER level and so this category of funds will be looked at in more detail in Section 4. Table 1. Actively managed equity funds - TER averages Simple Avg TER Asset-Wght Avg TER Asset-Wght Avg Perf Fee Avg Fund Assets All cross-border funds 1.96% 1.70% 0.12% 193.8 True cross-border funds 1.93% 1.79% 0.09% 250.1 Round-trip funds 2.30% 1.82% 0.09% 73.6 Leading Fund Intelligence 3

Examining the breakdown of the TER (see Table 2), around half the difference in the average TER between true cross-border funds and the entire cross-border funds universe comes from increased non-management expenses; namely administration and Other expenses. Administration expenses mainly cover fund accounting, net asset value (NAV) calculation, share registration and domiciliation costs. These expenses may also increase with different currency share classes. Typical expenses included in the Other Fees category are audit, legal, directors, marketing and publication fees charged outside the management fee. ( Other expenses are grouped together mainly due to the lack of consistency in funds financial statements as to what types of expenses are disclosed separately, or are simply shown as other expenses in these statements). Importantly, for the vast majority of European funds, management fees disclosed will include annual distribution fees that are paid back at different levels to intermediaries on a case-by-case basis. The level of distribution fees available is likely to be a relevant factor for effective cross-border fund sales. Table 2. Actively managed equity funds - TER breakdown Asset-weighted averages TER Mgmt Fee Admin Fee Cust. Fee Other Fees All cross-border funds 1.70% 1.40% 0.11% 0.06% 0.13% True cross-border funds 1.79% 1.45% 0.14% 0.06% 0.15% Round-trip funds 1.82% 1.54% 0.04% 0.12% 0.11% We have seen that generally the TER reduces as assets increase, for example with the diminution of the average TER when weighted by fund assets. This is mainly due to fixed non-management expenses being spread over a larger pool of assets. However, management fee levels tend to remain stable regardless of rises in fund assets as the vast majority of funds charge a fixed management fee percentage regardless of the amount of assets held. Increasing markets into which funds are distributed increases the potential to attract more investors. But while one might then anticipate that the average TER would decline as funds registrations for sale increase, the increased weight of administration and other expenses seems to prevent this from happening, on average (see Table 3). This analysis shows that annual operating expenses generally rise in line with the number of market registrations. Further, the average fund size for different numbers of market registrations does not correlate to higher or lower average TERs. For example, funds marketed into one country have a relatively small average fund size but also a relatively low average TER, while funds marketed into nine countries have the largest average fund size but also the highest average TER. Leading Fund Intelligence 4

Graph 1. Actively managed equity funds - TER trends by market registrations 2.00% 1.90% Average TER Average Mgmt 1.80% 1.70% 1.60% 1.50% 1.40% 1.30% 1.20% 0 2 4 6 8 10 Table 3. Actively managed equity funds - TER breakdown by market registrations Number of Asset-weighted averages Market Registrations TER Mgmt Fee Admin Fee Cust Fee Other Fees Avg. Fund Assets 9 1.92% 1.46% 0.21% 0.06% 0.18% 403.0 8 1.80% 1.51% 0.09% 0.02% 0.19% 272.1 7 1.81% 1.40% 0.18% 0.09% 0.15% 175.7 6 1.77% 1.48% 0.07% 0.04% 0.19% 161.2 5 1.77% 1.48% 0.11% 0.08% 0.12% 96.4 4 1.67% 1.50% 0.08% 0.05% 0.05% 242.2 3 1.56% 1.37% 0.04% 0.07% 0.08% 236.5 2 1.50% 1.26% 0.06% 0.06% 0.11% 140.0 1 1.56% 1.35% 0.07% 0.06% 0.08% 135.9 Correlation (R 2 ) 0.90 0.45 0.54 0.04 0.64 0.38 Within the TER, administration fees for funds registered in nine European markets (with an average of 0.21%) are three times higher than for funds only distributed into one jurisdiction (0.07%). The relationship between annual expenses and market registrations is even clearer for other fees, particularly when contrasting the average between six or more markets with that for four or fewer markets. Importantly, costs that increase as a result of pan-european distribution, such as those for marketing and printing, for example as a result of translation, will be included as other expenses. Leading Fund Intelligence 5

While average management fees are noticeably lower for three or fewer market registrations compared to the average for greater numbers of market registrations, the difference is not sufficient to explain the TER variations highlighted earlier. Nor do management fees vary uniformly by number of market registrations, as average TERs generally do. The strength of the relationships described above are measured by a coefficient of determination or R-squared (R 2 ) in Table 3. This measures the degree to which the movement of the average annual expenses are related to the number of markets into which funds are registered for sale. The coefficient can vary from 0 (no correlation) to +1 (perfect correlation). We can see that there is a near-perfect positive correlation between increasing European market registrations and rising average TER (0.90), but little correlation when looking at market registrations and custody fees (0.04%). Leading Fund Intelligence 6

1.2 Bond funds Asset-weighted average TERs for true cross-border bond funds are higher by ten basis points than the same average TERs for all cross-border funds (1.00%), as well as having the largest average fund size. In this way, bond funds present a similar trend to the one described above for equity funds (Table 1), although the true cross-border bond funds also show the highest simple average TERs. As before, round-trip funds lower average net assets is noticeable in pushing the simple average TER above that of the other two categories. However, the asset-weighted average TER is below that for true cross-border funds. Table 4. Bond funds - TER averages Simple Avg TER Asset-Wght Avg TER Asset-Wght Avg Perf Fee Avg Fund Assets All cross-border funds 1.16% 1.00% 0.01% 239.2 True cross-border funds 1.22% 1.10% 0.01% 284.2 Round-trip funds 1.24% 1.04% 0.03% 138.4 As with equity funds, bond funds show that the difference in average management fees between true cross-border and all cross-border funds makes up nearly all of the difference between average TERs (see Table 5). Table 5. Bond funds - TER breakdown Asset-weighted averages TER Mgmt Fee Admin Fee Cust. Fee Other Fees All cross-border funds 1.00% 0.82% 0.05% 0.05% 0.09% True cross-border funds 1.10% 0.88% 0.06% 0.04% 0.11% Round-trip funds 1.04% 0.82% 0.03% 0.10% 0.10% The correlation between increasing the number of European markets for sale and TER averages for bond funds is less clear than for equity funds, but is still present (see Table 6). Our analysis reveals that the variations in average management fees for bond funds are not related to the number of European markets into which a fund is registered. For bond funds, the impact of other expenses becomes crucial as the number of markets increases. Comparing bond funds with equity funds, administration expenses show a correlation with market registrations, but such a relationship is not as strong. There is again no correlation for custody fees. Fund size does not seem to be a function of the number of countries into which bond funds are marketed regardless of the number of registrations, fund sizes generally stay comparable. Leading Fund Intelligence 7

Graph 2. Bond funds - TER trends by market registrations 1.30% 1.20% Average TER Average Mgmt 1.10% 1.00% 0.90% 0.80% 0.70% 0.60% 0 2 4 6 8 10 Table 6. Bond funds - TER breakdown by market registrations Number of Asset-weighted averages Market Registrations TER Mgmt Fee Admin Fee Cust Fee Other Fees Avg. Fund Assets 9 1.24% 0.85% 0.19% 0.04% 0.17% 242.2 8 1.10% 0.82% 0.04% 0.07% 0.18% 286.8 7 1.14% 0.88% 0.08% 0.04% 0.14% 233.2 6 1.08% 0.96% 0.03% 0.00% 0.08% 547.1 5 0.94% 0.80% 0.04% 0.03% 0.08% 271.5 4 0.93% 0.83% 0.03% 0.03% 0.04% 241.8 3 1.10% 0.93% 0.03% 0.08% 0.07% 281.2 2 0.81% 0.69% 0.02% 0.04% 0.06% 219.8 1 0.91% 0.77% 0.02% 0.06% 0.05% 194.0 Correlation (R 2 ) 0.65 0.17 0.50 0.04 0.78 0.07 Leading Fund Intelligence 8

1.3 Cash/short-term funds We have included analysis of cash funds to create a fuller picture, but would note that the results should be treated with some caution due to the significantly smaller universe of cross-border funds for this asset class. The difference between true cross-border and all cross-border cash funds asset-weighted TER averages is negligible, 0.69% and 0.68% (see Table 7). Nor does the breakdown of fees and expenses reveal any significant differences between these two groups (not shown). As a result, cash funds do not seem to follow the same cost model as equity and bonds funds, although the smaller margins for this asset class should also be borne in mind. Interestingly, this asset class does show the greatest proportional difference between the simple average TER (0.82%) and the asset-weighted average TER (0.69%) for true cross-border funds: a 16% reduction. This would suggest that non-management expenses as a percentage of fund assets can get disproportionately high in smaller funds for this asset class. Table 7. Cash funds - TER averages Simple Avg TER Asset-Wght Avg TER Asset-Wght Avg Perf Fee Avg Fund Assets All cross-border funds 0.77% 0.68% 0.00% 401.2 True cross-border funds 0.82% 0.69% 0.00% 461.0 Round-trip funds 0.77% 0.80% 0.02% 392.1 The number of markets into which a cross-border cash fund is registered for sale and its annual expenses are not strongly related (see Table 8). While the more noticeable relationship with administration and other expenses seems to bear out findings for equity funds and bond funds, again this should be treated with caution due to the smaller universe of funds. Table 8. Cash funds - TER breakdown by market registrations Number of Asset-weighted averages Market Registrations TER Mgmt Fee Admin Fee Cust Fee Other Fees Avg. Fund Assets 9 0.67% 0.50% 0.07% 0.03% 0.08% 241.4 8 0.81% 0.47% 0.14% 0.06% 0.16% 145.3 7 0.78% 0.66% 0.02% 0.03% 0.07% 599.5 6 0.81% 0.72% 0.04% 0.01% 0.05% 682.8 5 0.56% 0.42% 0.02% 0.02% 0.10% 504.7 4 0.68% 0.60% 0.01% 0.03% 0.04% 235.0 3 0.63% 0.61% 0.01% 0.01% 0.01% 626.5 2 0.70% 0.57% 0.03% 0.06% 0.04% 297.5 1 0.66% 0.54% 0.02% 0.06% 0.05% 383.5 Correlation (R 2 ) 0.18 0.01 0.40 0.05 0.41 0.02 Leading Fund Intelligence 9

2 True Cross-Border Funds In this section we focus specifically on true cross-border actively managed equity funds, analysing the factors impacting their expense levels, and how these levels vary with the number of markets into which funds are sold. We do this by restricting the funds universe by investment area and then by comparable ranges of assets under management. 2.1 Mainstream investment areas Looking at a comparable range of mainstream investment areas (which we define as funds investing in a European domestic market, US, Europe, Global, Japan or Far East/Pacific) lowers the average TER but the overall picture is similar to that in Section 1. The lower average TER reflects both that more specialised sectors (e.g. Technology) and less developed geographic areas (e.g. Emerging Markets) have been excluded, which tend to have higher operating costs, as well as the fact that the average level of assets has increased as these more specialised funds tend to be smaller. Table 9. True cross-border mainstream actively managed equity funds - TER averages Asset-weighted averages TER Mgmt Fee Perf Fee Avg Fund Assets All cross-border funds 1.64% 1.35% 0.10% 234.6 True cross-border funds 1.73% 1.41% 0.06% 314.1 Round-trip funds 1.76% 1.49% 0.06% 84.9 By filtering the annual expense data by number of market registrations for the same funds universe we come up with generally similar results as those seen earlier (see Table 10). For example, administration and other fees remain at similar levels and with comparable correlation to that seen in Table 3. However, as above, the averages themselves are lower, mainly due to significant decrease in management fee averages. Indeed, we now see no correlation between average management fees and market registrations but, despite this, the TER correlation remains. We also split these results by individual investment areas and found the same general trends with no significant differences. Leading Fund Intelligence 10

Table 10. True cross-border mainstream equity funds - TER breakdown by market registrations Number of Asset-weighted averages Market Registrations TER Mgmt Fee Admin Fee Cust Fee Other Fees Avg. Fund Assets 9 1.88% 1.42% 0.21% 0.04% 0.20% 527.5 8 1.76% 1.50% 0.07% 0.01% 0.18% 390.2 7 1.75% 1.34% 0.18% 0.09% 0.14% 245.4 6 1.73% 1.47% 0.06% 0.03% 0.17% 193.7 5 1.73% 1.43% 0.11% 0.08% 0.12% 101.4 4 1.63% 1.49% 0.08% 0.03% 0.03% 294.0 3 1.49% 1.32% 0.03% 0.07% 0.08% 295.7 Correlation (R 2 ) 0.85 0.06 0.48 0.10 0.76 0.34 2.2 Asset ranges Filtering the sample further and including only funds in mainstream investment areas with total net assets between US$ 100 million and US$ 1 billion, uniform though minimal reductions in TERs can be observed. The same overall trends remain unchanged as true cross-border funds are still on average more expensive than all cross border funds. Table 11. True cross-border mainstream equity funds between US$100m and US$1bn - TER averages Asset-weighted averages TER Mgmt Fee Perf Fee Avg Fund Assets All cross-border funds 1.62% 1.35% 0.10% 676.7 True cross-border funds 1.73% 1.41% 0.06% 727.8 Round-trip funds 1.69% 1.49% 0.04% 506.6 Leading Fund Intelligence 11

3 Fund Promoters TER Averages For an individual investor, there is a wide range of products at different levels of charges. To illustrate this, we have examined the average TERs (and management fees) for true cross-border fund promoters. This reveals wide differences in TER averages between fund promoters. The asset-weighted average TER for true cross-border actively managed equity funds is 1.79%, but promoters average TERs range from 1.21% to 2.93%. The average number of registrations for sale per fund for this fund universe is 6 markets, but this number can vary a great deal across promoters. One can also note the predominance of UK (20) and US promoters (19) in this analysis. For US companies in particular, this is likely to reflect that those who enter the European market will tend to use a cross-border centre in order to maximise opportunities to attract fund assets by registering their funds in multiple jurisdictions. We have restricted our fund sample to actively managed equity funds investing in mainstream areas (which we define as funds investing in a European domestic market, US, Europe, Global, Japan or Far East/Pacific), registered for sale in at least three markets other than their country of domiciliation. Promoters must have more than three funds meeting these criteria to qualify. Additional (generally non- A ) share classes have been excluded, as have overtly institutional and other non-retail funds. Table 12. Fund promoters TER averages ( true cross-border actively managed equity funds) Fund Promoter Country of origin Asset-weighted averages TER Mgmt Fee Avg Fund Assets Avg No. Mkt Reg. Average (All promoters) 1.79% 1.45% 250.1 6 Robeco Group Netherlands 1.21% 1.07% 1,367.6 7 DekaBank Deutsche Girozentrale Germany 1.24% 1.00% 1,900.0 3 COMINVEST Germany 1.24% 1.11% 247.0 3 Banque de Luxembourg Luxembourg 1.25% 1.00% 261.0 5 Syd Invest International Denmark 1.30% 1.30% 11.0 3 F&C UK 1.32% 1.03% 72.4 4 Coutts & Co. UK 1.34% 1.34% 50.2 3 Jyske Bank Denmark 1.37% 0.01% 24.3 3 T Rowe Price Associates US 1.41% 1.25% 34.8 3 Deutsche Bank/DWS Germany 1.44% 1.44% 1,143.6 5 Union Investment Germany 1.45% 1.23% 368.8 4 Grossbötzl, Schmitz & Partners Germany 1.45% 0.99% 21.3 3 KBC Asset Management Belgium 1.46% 1.18% 134.0 3 JO Hambro Capital Management UK 1.49% 1.25% 86.8 5 Activest/HypoVereinsbank (HVB) Germany 1.50% 1.29% 108.3 4 Leading Fund Intelligence 12

Table 12 continued Fund Promoter Country of origin Asset-weighted averages TER Mgmt Fee Avg. Fund Assets Avg No. Mkt Reg. Axa Rosenberg Inv. Mgmt US 1.51% 1.35% 475.3 9 ING Netherlands 1.55% 1.20% 192.1 8 M&G UK 1.56% 1.37% 524.3 4 Pictet Funds Switzerland 1.59% 1.19% 274.1 9 First State Investments Australia 1.61% 1.50% 202.0 6 Pioneer Investments US 1.61% 1.50% 655.7 6 Capital International US 1.62% 1.50% 93.0 6 Threadneedle Asset Management UK 1.63% 1.48% 583.9 4 Swiss Life Funds Switzerland 1.63% 1.43% 102.1 3 Raiffeisen Capital Management Austria 1.64% 1.50% 577.0 3 Dexia Group Belgium 1.64% 1.19% 178.7 6 Baring Asset Management UK 1.64% 1.43% 108.6 5 GAM UK 1.65% 1.50% 298.0 9 Russell Investment US 1.65% 1.54% 24.3 6 Allianz Global Investors Germany 1.67% 1.45% 73.2 5 Mellon Fund Managers US 1.70% 1.54% 293.4 5 Sinopia AM, BBV & KBC Joint Vent. 1.70% 1.15% 47.5 6 Skandia Group Sweden 1.70% 1.50% 145.5 5 Merrill Lynch US 1.71% 1.50% 206.0 6 ABN AMRO Investment Funds Netherlands 1.73% 1.41% 121.3 9 SEI Investments US 1.73% 1.55% 12.6 3 Gartmore Inv Mgmt UK 1.75% 1.50% 182.3 9 Morgan Stanley US 1.75% 1.34% 227.3 7 Julius Baer Inv Fund Services Switzerland 1.75% 1.26% 125.4 6 Axa France 1.77% 1.50% 104.8 8 UBS Switzerland 1.77% 1.72% 891.0 8 Société Générale/Frank Russell AM Joint Vent. 1.78% 1.65% 76.0 7 Lazard Asset Management UK 1.79% 1.49% 60.0 5 Fortis Investments Belgium 1.80% 1.37% 111.6 7 Comgest France 1.81% 1.57% 187.2 6 LeggMason Group US 1.81% 1.04% 232.7 7 Martin Currie Management UK 1.83% 1.50% 75.4 5 Crédit Agricole France 1.83% 1.39% 49.5 9 Bearbull Switzerland 1.83% 1.33% 29.2 3 Lloyds TSB Bank UK 1.84% 1.54% 81.1 5 Barclays UK 1.84% 1.26% 57.8 5 Mediolanum Italy 1.84% 1.75% 396.1 4 Sarasin Investment Funds Switzerland 1.86% 1.54% 108.3 4 Natexis France 1.86% 0.36% 16.8 3 Aberdeen Asset Managers UK 1.87% 1.50% 133.8 6 Leading Fund Intelligence 13

Table 12 continued Fund Promoter Asset-weighted Avg. Fund Avg No. Country of averages Assets Mkt origin TER Mgmt Fee Reg. Schroders UK 1.88% 1.33% 340.4 9 JPMorgan Fleming US 1.90% 1.50% 785.1 9 BNP Paribas France 1.91% 1.51% 254.7 9 Franklin Templeton Inv Mgmt US 1.91% 1.04% 986.1 9 Nordea Denmark 1.93% 1.50% 1,030.3 7 Basler Lebens Versicherungs Switzerland 1.93% 1.50% 5.5 4 Vontobel Asset Management Switzerland 1.94% 1.58% 209.6 6 Société Générale Group France 1.94% 1.65% 77.5 8 INVESCO UK 1.95% 1.49% 136.1 7 Henderson Global Investors UK 1.95% 1.20% 309.8 8 Goldman Sachs US 1.96% 1.25% 48.0 8 Edmond de Rothschild AM Switzerland 1.96% 1.50% 32.5 4 Fidelity Investments US 1.96% 1.51% 1,398.7 9 IXIS Asset Management France 1.97% 0.86% 35.7 7 HSBC UK 1.97% 1.58% 158.1 9 LGT Capital Management Liechtenstein 1.99% 1.44% 215.3 3 Lombard Odier Darier Hentsch Switzerland 1.99% 1.65% 129.5 7 Alliance Capital Management US 2.00% 0.84% 421.3 7 Massachusetts Financial Services US 2.02% 1.05% 16.7 7 Fideuram Group Italy 2.05% 1.80% 667.4 3 American Express Bank US 2.06% 1.23% 32.4 7 Janus International US 2.06% 1.17% 186.0 8 Union Bancaire Privée Switzerland 2.09% 1.49% 152.9 7 Credit Suisse Switzerland 2.11% 1.92% 135.8 7 Banco Bilbao Vizcaya Argentaria Spain 2.27% 1.83% 22.6 3 Banque Syz Switzerland 2.27% 1.75% 116.8 6 Banca del Ceresio Switzerland 2.37% 2.03% 133.4 4 New Star Investment Funds UK 2.38% 1.75% 36.0 4 Aviva UK 2.43% 1.76% 3.9 6 Principal Global Investors UK 2.63% 1.75% 15.0 5 Putnam Investments US 2.88% 2.00% 11.8 6 Ademus France 2.93% 2.00% 58.8 4 Average (All promoters) 1.79% 1.45% 250.1 6 Leading Fund Intelligence 14

4 Round-Trip Funds So far in this report round-trip funds have been included as a reference point for comparison purposes. In this section, we look more closely at the variations in their TER levels. Among the different European markets studied, we have looked at those with at least 40 round-trip funds. Previously we have seen that round-trip funds consistently have higher TERs than for all cross-border funds. However, our analysis reveals that their annual expenses vary greatly depending on the market into which they are sold (see Table 13). The difference between maximum and minimum asset-weighted average TERs for round-trip actively managed equity funds is above 75 basis points: those funds sold back into Italy have an average TER of 2.09% compared with 1.33% for funds targeting the German market. If we look at the main markets individually, we can observe that, although all markets shown are fairly comparable in average fund size, the two main markets for round-trip funds by number of funds are Germany and Italy. As highlighted above, the average TER levels for these two markets are at opposite ends of the scale, which reflects our research findings (outside the scope of this current report) as to their relative levels of TERs for domestically domiciled funds. This highlights that roundtrip funds TER levels are likely to follow closely the TER levels for each respective home-market. Table 13 - Round-trip funds TER averages per market Market Simple average TER Asset-weighted average TER Asset-weighted average Perf Fee Avg Fund Assets Actively managed equity funds Germany 2.40% 1.33% 0.10% 94.0 Italy 2.35% 2.09% 0.06% 93.2 Switzerland 2.19% 1.92% 0.08% 67.2 UK 2.14% 1.71% 0.20% 44.8 All funds and markets 2.30% 1.82% 0.09% 73.6 Bond funds Germany 1.03% 0.86% 0.01% 148.4 Italy 1.38% 1.23% 0.07% 142.6 Switzerland 1.16% 1.10% 0.00% 100.2 All funds and markets 1.24% 1.04% 0.03% 138.4 Leading Fund Intelligence 15

5 Conclusions Cross-border marketing Marketing funds into multiple countries is most likely to incur additional expenses. This is one factor in explaining why the cross-border centres of Luxembourg and Ireland tend to have higher average TERs than other European fund jurisdictions. Such expenses partly reflect the fact that Europe is not a single market but multiple markets with different national distribution structures, fee tolerance levels and product preferences. In contrast to a market such as the US, cross-border European funds also have to deal with the cost implications of factors such as multiple languages and multiple fund currencies. Economies of scale There is a correlation between increasing market registrations and average equity fund assets, albeit not that strong. However, no such correlation exists for the other asset classes examined. Our analysis suggests that economies of scale achieved by true cross-border funds are insufficient to overcome the additional costs resulting from additional market registrations. If cross-border mergers become easier to carry out over the coming years, it could well be that further economies of scale will be achieved and help to offset additional expenses for funds in this report. Management fees While increasing market registrations increases opportunities to attract more investors, time and again comments from industry participants indicate that effective cross-border selling of funds must be supported by the capacity to pay sufficient levels of fees to distributors. Selling funds cross-border can push up management fees from which annual distribution fees are paid. However, as such distribution fees are not transparent in financial statements for the vast majority of European funds, it has not been possible to determine the degree to which this occurs. It is of note that management fees are less strongly correlated to the number of market registrations than administration and other expenses (and the correlation that exists relates only to equity funds). Share classes Fund management companies continue to increase their use of multiple share classes with differentiated fee structures. Share classes enable the same fund to be sold into different markets with a different fee structure for each, reflecting local market practices and fee tolerance levels. Leading Fund Intelligence 16

In this way, annual expenses incurred in selling a fund in certain markets are not necessarily split across all shareholders but targeted only at the relevant investor group. This would be one way to help offset cross-border fund ranges higher non-management expenses. However, this is also likely to help preserve the higher annual fee levels in some markets. Funds with low TERs We have provided evidence that cost-conscious investors can find more funds with lower TERs as a result of cross-border distribution (i.e. fund promoters TER averages). In this way, consumers have the opportunity to weigh up a range of factors when deciding into which funds they will invest. To help this process, the Lipper Leaders system uses investor-centred criteria to deliver a simple, clear description of a fund's success in meeting certain goals. Further details can be found at: http://leaders.lipperweb.com Fund governance While the benefits of marketing funds cross-border are clear, not least in increasing potential economies of scale, fund companies are also having to deal with pressures on annual expense levels that result. As the European industry has moved forward on improving disclosure of TERs to ensure effective investor protection and enhance investor confidence (European Commission, 2004/384/EC), ongoing oversight of expense levels by directors or other fiduciaries can only be of benefit to investors, and thus the industry as a whole over the longer term. Leading Fund Intelligence 17

6 Methodology Source. This report is based on Lipper Fitzrovia s fund charges databases of July 2006. Only the latest TER data calculated is included in the current report, thus including a predominance of yearend 2005 financial statements. Markets. We have analysed European funds registered for sale in the largest markets in Europe: Austria, Belgium, France, Germany, Italy, Spain, Sweden, Switzerland and the UK. The assets in these markets, when combined with the cross-border centres of Luxembourg and Dublin that are also included in this report, represent 94% of the total European fund industry (EFAMA, June 2006). Retail funds. Aiming for like-with-like comparisons, the funds universe has been filtered to exclude any overly institutional funds or other non-retail funds. For funds with multiple share class, only the main retail share class has been included. Total Expense Ratio. The Total Expense Ratio (TER) is a measure of the total annual operating expenses of a fund, expressed as a proportion of its average net assets. In addition to quoted management fees, funds will bear additional expenses related to the ongoing costs (administration, custody and audit expenses, for example) that will indirectly impact on investors through reduced returns. Because the TER includes both management fees and these additional expenses, it is a more comprehensive indicator of the level of annual charges paid by funds investors than the management fee alone. The TER offers a fair comparison of fund expenses across different markets. Lipper Fitzrovia has been calculating TERs over the last 12 years, using the same, consistent methodology. For this current study, the impact of performance fees have been excluded from the TER in order to create reasonable comparisons, but also shown separately. Fund universe. Based on the above restrictions, the total universe for this study was established at over 7,700 cross-border funds sold into at least one of the 9 European markets cited above. There are no restrictions on the fund domicile which explains the high representation of Luxembourg and Dublin domiciled funds in the universe - this reflects the fact that these two domiciles have grown primarily as cross-border fund centres due to their early adoption of UCITS at a local level. All Cross-border funds. The figures for the whole cross-border universe are shown under all cross-border funds. All funds registered for sale in at least one market (other than their country of domiciliation) are shown under this category. True Cross-border funds. This category is made up only of funds registered for sale in at least three markets across Europe in addition to their respective home-domicile. The true cross-border category amounts to nearly 3,200 funds - corresponding to 41% of our total fund universe. Round-trip funds. Funds solely marketed back into their promoter s home-market but domiciled elsewhere. Over 1,600 round-trip funds, predominantly domiciled in Luxembourg and Dublin, were identified in our universe. These round-trip funds make up around 21% of our fund universe. Leading Fund Intelligence 18

Non-European markets. All of the data contained in this report is correct to the best of our knowledge. However, we appreciate that some discrepancies may occur in our findings due to the fact that we only analysed nine European markets while funds might also be registered for sale in other jurisdictions in Europe or elsewhere. We believe that our findings remain reasonable and currently the only way to assess the issues under examination. Leading Fund Intelligence 19

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