Fee hike fears for low-cost funds

6 August 2012 | By Chris Salih

New rules imposed by the European Securities Markets Authority could result in low-cost funds becoming more expensive, experts have warned.

ESMA has proposed that all profits made by fund managers who lend out stocks should be returned to investors. Stock lending is often used in the exchange traded funds market, where holdings are traded less frequently and can be “hired out” relatively easily. Managers use the income they receive from loaning stock to hold annual management fees at a low level.

According to the FT, the rule changes could see greater transparency enforced on the way funds manage investments, but experts say that any losses from the likes of ETF providers – which can charge as little as 0.3 per cent per annum for managing the funds – could be made up for by increasing fees for investors.

European Fund and Asset Management Association director general  Peter de Proft says: “If you take away the revenue from stock lending then the cost of running the funds will go up and someone is going to have to pay that cost.”

Interactive Investor head of funds business John Blowers says: “Although additional layers of regulation may be seen as the fix-all from bureaucrats, ultimately this adds to the cost of administering the funds and the managers will simply pass these costs on to the investors, who are already battling with poorly performing markets.”

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