Investment Fund Governance: An empirical investigation of Luxembourg UCITS

Investment funds potentially suffer from the conflict of interest between investors and fund management companies. Fund boards could help mitigate this conflict. In Luxembourg, the second largest fund domicile globally, fund boards are not required to have independent board members. Nevertheless, many firms have independent board members on their fund boards.
The research question investigated is whether or not boards with (more) independent board members are more effective for investors, leading to lower costs (Total Expense Ratio) and/or better investment performance (Carhart alpha). With a multiple regression analysis, the relationship is analysed of the level of fund costs and performance with the funds’ governance characteristics, controlling for various other promoter, umbrella and fund variables. This approach did not provide consistent evidence that independent governance contributes to lower costs or better performance. The survey among board members showed that irrespective of whether or not the boards have independent board members, fund boards in the sample prioritise risk management and compliance aspects. Lower priority is given to investment performance and costs.
Both for the level of costs and performance, whether or not the promoter had affiliated distribution in the group seems to be a more important driver than the composition of the fund board.