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ARCHIVE
Value Is in the Eye of the UCITS Holder
By Giles Swan
December 3, 2020
ICI research shows a steady decline in the cost of investing in Undertakings for the Collective Investment in Transferable Securities (UCITS). European regulators are looking beyond just declining cost, however, by requiring UCITS managers to justify the value of these funds to investors. But how do investors assess value relative to cost, and what is the role of regulators?
Is There a Difference Between Cost and Value?
Yes—a big difference. Investors value UCITS that allow them to pursue their desired investment outcomes—regular income, capital growth, or both. Investors incur costs when using the services of a UCITS manager—professional management of a portfolio, access to a wide array of different global investment options, and the benefits of regulation and oversight—in pursuit of those investment outcomes.
That seems straightforward. But how do investors assess whether a UCITS will enable them to achieve their desired investment outcomes and whether the cost and quality of the UCITS manager’s services will match their expectations? In other words, how do investors assess value?
There is no simple answer. Investors seek differing investment outcomes and assess the value of a UCITS based on its usefulness in achieving their particular outcomes. UCITS managers offer a wide range of UCITS with different approaches—such as providing asset allocation, index tracking, or active management—that appeal to different investors. But, with such a broad choice, value can be hard to define.
One simple, seemingly objective approach would equate low cost with high value. But such an assessment is badly flawed on two counts. First, it overlooks the many differences among investors—the investment outcomes they seek, the types of service they desire, and the goals they seek to fulfill, including, for some, achieving environmental, social, or governance (ESG) outcomes. Second, it fails to take into account the multitude of different ways UCITS managers seek to meet investor outcomes and objectives. Investors need to assess value on a more thorough basis that considers the UCITS’ cost and performance and the UCITS manager’s services.
Elements of Value: Cost
UCITS enable investors to access a wide array of global investment options. Investors pay UCITS managers a fee that is dependent on the asset class, management technique of the UCITS manager, and a range of other factors. For instance, actively managed UCITS are generally more costly than index tracking funds—investors pay average ongoing charges for actively managed equity UCITS of 1.36 percent compared with 0.28 percent for index tracking equity UCITS. The higher fees charged by active managers reflect the additional significant research about individual stocks or bonds, market sectors, or geographic regions for active UCITS—offering investors the chance to earn superior returns or to meet other investment objectives such as limiting downside risk, managing volatility, under- or overweighting various sectors, or altering asset allocations in response to market conditions. These characteristics tend to make active management more costly than management of an index tracking UCITS.
Investors assess the appropriateness of fees based on the UCITS manager’s approach to achieving their desired investment outcomes—the target level of investment return—and the risk of not doing so.
Regulators have recently sharpened their focus on assessing whether UCITS managers are levying “undue” costs on investors that are inconsistent with, or prohibitive to, a UCITS achieving its stated outcomes and objectives. For instance, regulators are examining how UCITS managers ensure that they have their clients’ best interest at heart and that costs and charges are reasonable and disclosed in a transparent and non-complex manner.
Elements of Value: Investment Performance
UCITS investors anticipate favorable future investment performance in line with their desired investment outcomes. Investor expectations are based on an assessment of the UCITS’ investment objectives and investment horizon against desired investment outcomes, in either absolute or relative returns, and the UCITS manager’s approach to achieving these outcomes. Regulators are examining more closely how the performance of UCITS matches investor expectations.
Elements of Value: Services
UCITS investors evaluate the services offered by a UCITS manager based on both “hard” and “soft” factors. The first includes the nature and quality of a UCITS manager’s investment approach; its organization, governance, and systems; its client engagement (e.g., reporting, customer service, complaints record); and other factors such as achieving sustainability-related investment outcomes. The second includes corporate brand, culture, and corporate values. Investors use a range of reference points when making this evaluation, including information from regulators, financial advisers, fund managers, and the media.
How Can Investors Be Supported When Assessing Value?
All investors need clear and correct information on costs, performance, and service to assess the value of a fund and understand how this fits with their expectations and intended outcomes. UCITS managers can provide this substantive information and regulators can support its clear and consistent disclosure to investors. Regulatory changes in the European Union, including MiFID II, have fostered simpler and more transparent fee disclosure, but further steps are necessary to ensure more harmonized and useful disclosure.
Some investors may benefit from professional financial advice to build a portfolio of UCITS to pursue their desired investment outcomes. Regulators should assess the distribution of UCITS to better understand investor choice, including the role and activities of intermediaries in fostering competition, delivering choice, and supporting investors in seeking out funds that provide the greatest value.
No single UCITS ticks all the boxes for all investors. Regulators should not favor one investment product over another—on the basis of cost or other metrics—or pass judgment on which UCITS provide the greatest value. Such an approach risks reducing choice, eroding efficient capital allocation and price discovery, and degrading competition and innovation. Instead, the market at large—with its myriad investors evaluating value with distinct outcomes in mind—is best placed to determine which UCITS best fit the bill.
Giles Swan is director of global funds policy at ICI Global.
Permalink: https://www.ici.org/viewpoints/20_view_ucitsvalue
TOPICS: Equity InvestingEuropeFund RegulationICI GlobalInternationalShareholder
Market Turmoil and Liquidity Crunch Rooted in the COVID-19 Pandemic
By Sean Collins
October 14, 2020
The first paper in ICI’s new research series, “The Impact of COVID-19 on Economies and Financial Markets,” focuses on the relationship between the pandemic, the economic shutdown it triggered, and the volatility that gripped the markets.
TOPICS: BondsCOVID-19Corporate BondsFinancial MarketsFinancial StabilityMutual Fund
Investing Basics: Saving for Retirement with a 401(k) Plan
By Christina Kilroy
September 9, 2020
The ICI Education Foundation’s Investing Road Trip ends at retirement, depicted with idyllic images of a park bench and a golf cart. But what if, in real life, your path doesn’t quite follow this tidy path? Even for workers who get a late start, hit some bumps, and take a few detours, saving for retirement is still possible. Here are guideposts for 401(k) saving as you journey to retirement.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
Investing Basics: Saving for Retirement on Your Own
By Christina Kilroy
August 31, 2020
A majority of workers aged 26 to 64 were active participants in a workplace retirement plan in 2017, according to ICI’s most recent tabulation of tax data. But what if you don’t have access to a workplace retirement plan? You still have great options to save for retirement with similar advantages to the 401(k). Learn more in the latest installment of ICI Education Foundation’s investing basics series.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
Congress Should Give Americans Flexibility to Keep Retirement Savings on Track
By Paul Schott Stevens
July 31, 2020
As policymakers take further steps to assist families and businesses weathering the storm, Congress can help American families get their retirement savings goals back on track by including the “Temporary Coronavirus-Related Catch-Up Contribution” proposal in the next COVID-19 relief package.
TOPICS: 401(k)Government AffairsIRAMutual FundRetirement PolicyShareholder
Investing Basics: Understanding Fees and Expenses
By Christina Kilroy
July 30, 2020
In the ICI Education Foundation’s Investing Road Trip exhibit, a toll booth illustrates the fees and expenses that are part of investing. Every vehicle on a toll road pays and some of that money helps to maintain the road, which ultimately makes for a smoother and safer trip for everybody. Likewise, every investor pays a cost to invest but receives professional management and services in return.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
IRA Investors Are Concentrated in Lower-Cost Mutual Funds
By James Duvall
July 30, 2020
Individual retirement accounts (IRAs) represent the largest share of assets in the US retirement market, with assets totaling $11.0 trillion at year-end 2019. As part of an ongoing effort to shed light on important insights into IRA investing, ICI is updating its analysis of expense ratios that investors pay on mutual funds in their IRAs.
TOPICS: 401(k)Bond FundEquity InvestingIRAMutual FundRetirement ResearchShareholder
A New Benchmark for Distribution Oversight
By Ahmed Elghazaly
July 21, 2020
On June 1, the fund industry achieved a milestone for global cooperation. In an industry-led agreement, fund distributors and fund managers of Undertakings for the Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs) joined together to issue a common protocol for distribution oversight.
TOPICS: EuropeFund GovernanceFund RegulationGlobalICI GlobalInternationalOperations and TechnologyShareholder
Investing Basics: Compound Returns and the Power of Reinvestment
By Christina Kilroy
June 29, 2020
Start saving early. You’ve heard it once, you’ve heard it a million times. There are a few reasons why that’s a good idea—to get in the habit, to manage risks to your investments and income, and to allow more time to contribute to your savings and let them grow. But the strongest case for starting early boils down to one phrase: compound returns.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
Tax Filing Deadline Extended to July 15: What It Means for IRA Savers
By Christina Kilroy
June 18, 2020
On March 21, 2020, the Treasury Department and Internal Revenue Service (IRS) extended the federal income tax filing due date—also known as Tax Day—for the 2019 tax year. Workers now have until July 15 to prepare their 2019 tax returns, as well as more time to consider options to potentially reduce taxable earnings. One of the easiest and most popular ways to reduce taxable earnings is contributing to an individual retirement account (IRA).
TOPICS: IRAInvestment EducationRetirement ResearchSavingsTaxes
2020 Investment Company Fact Book: Letter from the Chief Economist
By Sean Collins
May 19, 2020
A version of this letter by ICI Chief Economist Sean Collins was released in the Institute’s 60th edition of the Investment Company Fact Book.
TOPICS: Financial MarketsFund RegulationGlobalInvestor ResearchMutual FundPolicy ResearchRetirement PolicyRetirement ResearchSavingsShareholder
The US Retirement System Is Stronger Than Critics Portray
By Paul Schott Stevens
May 18, 2020
A recent Washington Post opinion piece paints an inaccurate and misleading picture of the US retirement system by misusing data and making false assumptions. The retirement system is far stronger than portrayed.
TOPICS: 401(k)IRARetirement Research
2020 Investment Company Fact Book: Letter from the President and CEO
By Paul Schott Stevens
May 13, 2020
This ICI Viewpoints is a version of a letter from ICI President and CEO Paul Schott Stevens that was released in the 60th edition of the Investment Company Fact Book.
TOPICS: Financial MarketsFund RegulationGlobalInvestor ResearchMutual FundPolicy ResearchRetirement PolicyRetirement ResearchSavingsShareholder
Investing Basics: 529 Savings Plans
By Christina Kilroy
May 7, 2020
One thing you can expect when you’re expecting a baby is to pay a lot for diapers—you might pay about $600 by your child’s first birthday. But the cost of diapers is child’s play compared to the costs that could come later when paying for college.
To encourage people to save for these education costs, nearly every state and the District of Columbia offer 529 plans, and most offer special tax treatment for savers participating in those plans.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
For Funds' Use of Derivatives, a Promising New Regulatory Framework
By Paul Schott Stevens
April 22, 2020
In a promising new proposal on the use of derivatives, the SEC has consolidated cumbersome regulatory framework into a single, comprehensive rule that is carefully designed to protect investors.
TOPICS: Equity InvestingExchange-Traded FundsFund RegulationMoney Market FundsMutual FundShareholder
Regulated Funds: Supporting the Economy During the COVID-19 Crisis
By Paul Schott Stevens
April 22, 2020
In a recent call with the Financial Stability Board, ICI President and CEO Paul Schott Stevens shared some findings and observations about the response of fund investors to recent developments in financial markets, and the picture that has emerged to date is reassuring. The extraordinary actions taken by the Federal Reserve, Treasury, the Securities and Exchange Commission, and Congress helped relieve pressure and ensure orderly functioning of US financial markets.
TOPICS: Financial MarketsFinancial Stability
Investing Basics: Tax Benefits to Encourage Saving
By Christina Kilroy
April 14, 2020
To encourage people to save, federal and state governments offer special tax treatment for savings plans for specific goals, such as retirement and education. By increasing the benefit that savers receive in the short term, the government nudges savers to take a positive action that will provide a benefit in the long term.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
Investing Basics: The Benefits of Mutual Funds
By Christina Kilroy
March 31, 2020
We’ve reached the halfway point in this series, and we’ve covered a lot of ground: the benefits of investing, how to think about risk, different types of investments, why diversification is important, and dollar-cost averaging. This month’s installment brings all these topics together and examines seven features of mutual funds that make them an enduringly popular investment choice.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
Working to Ensure Funds Can Maintain Vital Services
By Paul Schott Stevens
March 22, 2020
Key personnel of mutual fund sponsors and service providers should be deemed “essential workers” and thus should be permitted to report to work to maintain security and services for fund investors. Two key developments over the weekend offered some hope that state governors will hear this message and provide the needed relief from their shelter-in-place orders.
TOPICS: CybersecurityFinancial MarketsShareholder
During COVID-19 Crisis, Fund Company Staff Are Essential
By Paul Schott Stevens
March 20, 2020
As governments consider extending orders to “shelter in place,” they must include staff of fund companies among the “essential” workers who qualify for an exemption. Fund company staff are very much part of the country’s critical infrastructure, and they must be able to offer their full support to shareholders during these uncertain times.
TOPICS: CybersecurityFinancial MarketsShareholder
ETFs Are Passing the COVID-19 Crisis Test
By Shelly Antoniewicz
March 17, 2020
How have exchange-traded funds (ETFs) weathered the intensifying financial market fallout from the COVID-19 pandemic? So far, it looks like ETFs are healthy and robust.
TOPICS: Equity InvestingExchange-Traded FundsFinancial MarketsFinancial StabilityIndex FundTrading
Mutual Fund Flows in the COVID-19 Crisis
By Sean Collins
March 11, 2020
The novel coronavirus disease, or COVID-19, is taking a heavy toll on the world economy—in lives, in the costs of responding, and in lost production and consumption. Worldwide financial markets reflect this. How are retail investors reacting? Are they panicking, selling out? Or are they staying the course, as during previous financial market epidemics?
TOPICS: Bond FundCorporate BondsFinancial StabilityMutual Fund
Investing Basics: Dollar-Cost Averaging
By Christina Kilroy
February 27, 2020
Emotions are the enemy of successful investing. For long-term investors, dollar-cost averaging is a smart way to take the emotion out of investing and to eliminate the difficulty and uncertainty of trying to time the market.
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
A New Chapter of Growth and Impact: IDC’s 2019 Annual Review
By Thomas Kim
February 18, 2020
In a letter in the Independent Directors Council's 2019 Annual Review, IDC Managing Director Thomas Kim discusses the beginning of his role as head of IDC....
ICI Continues Its Work on Disclosure Improvements
By Paul Schott Stevens
February 12, 2020
In a letter to the New York Times in response to an article published earlier this month, ICI President and CEO Paul Schott Stevens refutes claims that ICI and the Securities and Exchange Commission (SEC) are seeking to "water down" disclosure requirements....
TOPICS: Fund RegulationMutual FundShareholder
ICI Members Are Monitoring the New Coronavirus Outbreak
By Peter Salmon
January 31, 2020
Earlier this week, ICI’s Industry Operations Department surveyed members of the Institute’s Technology Committee to better understand the measures being taken by ICI members to protect their employees and maintain business continuity in the face of the new coronavirus outbreak.
TOPICS: GlobalInternationalOperations and Technology
Investing Basics: Diversification
By Christina Kilroy
January 30, 2020
Eggs play a starring role in diversification’s ubiquitous analogy—one we used in the Investing Road Trip©—and for good reason. If you drop a basket holding all your eggs, you’ll be out a lot of eggs. Spreading your eggs across several baskets is a good defense against the risks of exposing all your assets to the same risk.
But perhaps we should also make the point that eggs shouldn’t be the only food in your basket. They may be high in protein, but your body needs a mix of nutrients for good health. Similarly, with investing, a better goal is to build a balanced “diet” of asset classes across industries, geographic areas, and types of securities....
TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder
Proxy Proposals Worth Supporting
By Matt Thornton
January 29, 2020
The SEC can save millions of dollars for registered fund shareholders, while maintaining investor protections, by reforming the fund proxy system. The system, which funds use to solicit votes from their shareholders, poses significant challenges and costs to funds and their investors. A new report by the Investment Company Institute points to concrete regulatory actions that would improve the efficiency and cost-effectiveness of the fund proxy system…
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