A Closer Look at Custodians and Admins in Europe

While service providers deal with an increasing amount of change, particularly around regulation, the market remains fairly static in terms of the number of providers, their fees and the number of funds who change providers.
By Jake Safane(2147484770)
While service providers deal with an increasing amount of change, particularly around regulation, the market remains fairly static in terms of the number of providers, their fees and the number of funds who change providers.

The charts below show Fitz Partners’ latest data from across three major fund jurisdictions in Europe, displaying the weighted average (accounting for fund size) of custody and administration fees for different types of funds—institutional bond funds, institutional equitiy funds, retail bond funds and retail equity funds.

Custody_Fees

Admin_Fees

As the data shows, fees are in many cases very low, perhaps as a result of the fact that providers don’t want to give funds a reason to take their business elsewhere; there were very few changes of service providers in the last two years, with only 1% of Umbrella funds in Fitz’s database changing administrators from one accounting year to another, for 2012 to 2013.

In looking at fund fees, Fitz’s founder and CEO Hugues Gillibert says, “The problem is that too much emphasis is put on the headline cost. The costs of any services are important, but the value is too.”

Improving transparency of fund fees at a more detailed level could be a positive for the industry though.

“The whole thing is to make sure you’re in the right place, you want to make sure your fund is well placed,” says Gillibert. “From an asset management point of view, you need to be comfortable with what you’re charging for the different aspects of the fund operations. From the investors’ point of view, it’s a good thing to know that the board is scrutinizing their fund’s fees in details, a proof that the fund is well managed.

“Usually fund houses in Europe would compare their funds only on the total expense, or the ongoing Charges Figure (OCF), but more and more groups are benchmarking their costs on all their fees, such as custody,” says Gillibert. “I hope that one day, Europe will get closer to a U.S style detailed yearly fee review which unlike in the U.S. is not a rule here, though we might get closer to this with the current discussions around MiFID II (Markets in Financial Instruments Directive II).”

With more transparent fees, perhaps the industry would then be able to focus more on what actually goes into the cost, as the charts above might not tell the whole story. For example, Luxembourg’s seemingly high fees can perhaps be explained by the international nature of these funds.

“Luxembourg has a reputation of being expensive, but it depends a lot on what you’re actually comparing. If you’re comparing funds of a simple structure, it’s definitely not true to say Luxembourg is always more expensive,” says Anouk Agnes, deputy director general, Association of the Luxembourg Fund Industry (ALFI).

“Where we might be perceived as more expensive is in the context of funds that are distributed internationally, where Luxembourg over the last 20 years has excelled or specialized in,” she says. “We have funds domiciled here that can be sold into 70 countries…Such a fund with an international orientation, is not comparable to a fund set up by a Luxembourg promoter in Luxembourg for the Luxembourg market, for example.”

Funds with lower fees may be “in domiciles that are lightly regulated, but they choose domiciles for that reason. People who come to Europe in general want a regulated structure, want a compliance structure,” adds Agnes.

Other jurisdictions in Europe that offer this regulated structure may still seem cheaper, but Agnes says that Luxembourg’s fees are still in line when comparing similar funds.

For example, “Ireland is very comparable to Luxembourg in its business model,” she says. “They’re providing a very good service. They may specialize in an Anglo-Saxon context, though, more often with an American clientele. Their specialization in international funds is really very comparable; it’s not necessarily much cheaper.”

In terms of the providers themselves in these jurisdictions, the market has also been relatively stable.

“Overall if you take the two big jurisdictions [Luxembourg and Ireland], they have been quite static markets over the years; you always have one or two players changing, but very few mergers or newcomers,” says Karine Pacary, managing director at Monterey Insight, a research firm that publishes service provider data for all funds across Luxembourg, Ireland, Jersey and Guernsey.

According to the latest data from Monterey, there were no changes in the number of companies offering custody in Ireland or Luxembourg. For administrators in Ireland, there were no new companies over the previous year, while two ceased operations, though Luxembourg was slightly more active with four new administrators and three ceasing activities, for a total of 101 administrators.

“Jersey and Guernsey are different in terms of the number of funds,” adds Pacary. “We are talking less than 2,000 funds for each jurisdiction; Ireland has over 7,500 funds. Therefore, Jersey and Guernsey are smaller in terms of the number of funds, however they each have roughly the same number of service providers as Ireland. Again the market is quite static, and the number of players usually remains the same year after year, with very little variation.”

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