Equity funds cost most to manage

PUBLISHED : Thursday, 08 September, 2005, 12:00am
UPDATED : Thursday, 08 September, 2005, 12:00am

Hong Kong investment funds notched up operating expenses of US$6.6 billion last year, representing 1.27 per cent of the industry's fund size, according to research conducted by information provider Lipper.

The study, which included data from all funds authorised for sale in Hong Kong, found that of the three major retail fund asset classes - equities, bonds and cash - equity funds had the highest total expense ratio (TER), at 1.84 per cent.

TER calculates all operating expenses charged to a fund for one year as a proportion of the fund's average net asset value. They include fees paid to third-party service providers such as administrators, custodians and auditors but exclude all one-off charges such as initial and exit fees.

Management fees charged by fund companies on both retail and institutional investors, which accounted for more than 75 per cent of operating expenses, totalled US$5.06 billion and represented 0.98 per cent of the fund size. Retail equity funds had an average management fee ratio of 1.43 per cent.

Bond funds and cash funds had expense ratios of 1.22 per cent and 0.76 per cent, and management fee ratios of 0.92 per cent and 0.51 per cent, respectively.

'In principle, the level of fees in each asset class should reflect the greater or lesser degree of active management needed to manage and run a fund,' the report said.

Funds catered specifically to institutional clients, on the other hand, have substantially lower expense ratios, as the higher minimum investment levels resulted in smaller number of clients and less work for fund administrators.

The equity, bond and cash fund classes for institutional investors have expense ratios of 1.04 per cent, 0.7 per cent and 0.24 per cent, respectively.

The Lipper report also found that funds invested in emerging markets incurred the highest expenses among all sectors, with a 2.11 per cent ratio, probably because of complications involved in investing in companies in these regions.

Those specialising in biotechnology and heath care, and telecommunications and technology also attract relatively higher ratios. Conversely, funds focusing on more mature and stable markets such as the United States, Britain, Japan and Europe rank much lower in the classification.