Simple Fixes to Protect Returns in Listed Funds
When Greenlock was just starting to work with funds, a client asked us to audit their structure. At first, everything looked standard — until we stumbled upon a curious share class. The minimum investment was just $10k, designed for plain-vanilla retail investors with the highest regulatory protection and enormous embedded retrocessions. Clearly, not a fit for a single-family office managing hundreds of millions.
As we dug deeper, it became clear this share class was created to sneak one investor past restrictions, exposing the fund to hidden costs and serious compliance risks. We helped the client unwind it, restructure transparently, and safeguard both their reputation and investor trust.
The Challenge
A single-family office (SFO) entrusts a significant portion of its wealth to a bank or third-party-managed mandate. While the mandate may seem straightforward, the true cost — spanning advisory, custody, brokerage/FX, and fund-level fees — is often obscured. Non-transparent share classes, where fees are not fully disclosed in standard reports, can significantly inflate expenses.
In this article, we focus on the lowest level of analysis — the individual fund — and show how decisions even at this level can significantly impact your results.
1. Fund Anatomy
To understand fund-level expenses, consider a common emerging market fund used in bank mandates: Goldman Sachs Funds II SICAV — Goldman Sachs Multi-Manager Emerging Markets Equity Portfolio, Class P USD Acc (ISIN LU0344076905).
For this retail share class, recent documents report:
- Ongoing charges: 1.40% (excludes transaction and borrowing costs).
- Entry cost (fund-level): Up to 5.50%, depending on the distribution channel.
- Transaction costs: ~0.18%.
Is this the best share class for an SFO as an institutional investor? Let’s compare.
Ongoing charges include management, administration, and operating costs but exclude transaction costs (e.g., brokerage, taxes) and any one-off distribution fees. The all-in cost for a fund is the sum of ongoing charges, transaction costs, and any entry fees. Choosing the best available share class (with lower or no entry fees) can reduce costs without changing market exposure. The best share class, often labeled “I” or “IO,” is designed for institutional investors, like family offices, offering the lowest fees.
Key takeaway: Selecting an institutional share class, such as IO (0.80% ongoing charges, 0% entry cost, $5,000,000 minimum investment), over P (1.40% ongoing charges, up to 5.50% entry cost, $5,000 minimum investment), can significantly lower costs for SFOs with larger investments.
Beyond share-class selection, the fund’s domicile can further impact returns through tax efficiency.
2. Taxes: EU Investor in US-domiciled Funds vs. UCITS
UCITS funds, regulated under EU rules, offer daily liquidity, clear disclosures, and strong oversight. For EU investors, they simplify tax and operational management.
Consider two options: - US-domiciled fund held directly by an EU resident: Dividends face a 30% withholding tax by default. With proper tax forms, this may drop to 15%, but the investor handles the paperwork and related costs. - UCITS fund investing in US equities: The fund typically secures reduced tax rates (e.g., 15% on US dividends), which are already factored into the fund’s value. Investors receive returns without the need for additional tax paperwork.
Key takeaway: UCITS funds simplify taxes for EU investors, avoiding the higher 30% tax rate and paperwork burden of US-domiciled funds.
Optimizing taxes is crucial, but the way a fund handles income distribution also affects efficiency and returns.
3. Accumulating vs. Distributing Share Classes
- Distributing (Dist) classes pay dividends or coupons in cash. This can be inefficient: cash payouts require reinvestment, incurring FX or transaction costs, and may sit idle, reducing returns. Distributions can also trigger early tax events.
- Accumulating (Acc) classes reinvest income within the fund’s value, keeping assets fully invested. While portfolio income still faces source-level taxes, there’s no cash flow to manage, and tax timing aligns with local rules.
Key takeaway: For mandates focused on total return, accumulating classes are typically more efficient, minimizing cash-handling frictions and tax complications.
While share classes and domicile address fees and taxes, currency fluctuations can also impact returns, leading some to consider currency-hedged options.
4. Currency-Hedged Share Classes: Worth the Cost?
Currency-hedged share classes aim to reduce the impact of exchange rate fluctuations by locking in returns to a specific currency. While this can be appealing for investors worried about currency risk, these classes often come with higher costs and complexities.
- Higher fees: Hedged classes typically have higher ongoing charges due to the cost of hedging instruments like forward contracts.
- Hedging effectiveness: Hedging may not eliminate currency risk, especially in volatile markets, and can introduce tracking errors if the hedge is misaligned with the portfolio’s assets.
- Strategic fit: For long-term investors like SFOs, currency fluctuations often balance out over time. Hedging may be unnecessary unless the portfolio has specific short-term currency exposure or cash flow needs in a particular currency.
Key takeaway: Currency-hedged share classes add costs and complexity, often outweighing their benefits for long-term investors.
By addressing fees, taxes, income distribution, and currency hedging, SFOs can unlock significant savings and streamline their portfolios.
Conclusion
Hidden fees, suboptimal share classes, tax inefficiencies, poor fund domiciling, and unnecessary hedging can erode family office returns. By choosing institutional share classes, UCITS funds, accumulating classes, and avoiding costly hedged classes, SFOs can reduce expenses and simplify operations. For example, switching to an IO share class and UCITS fund could save up to 0.7% annually on fees and taxes. GreenLock’s platform helps by analyzing and comparing the full fee structure, enabling informed decisions that drive measurable savings.
Sergey Borzenko
COO, GreenLock AG
