Independence and focus of Luxembourg UCITS fund boards

Investment funds are potentially plagued by principal-agent problems between investors and fund management companies, in particular with respect to fees. Market forces play a role in mitigating these problems, but based on existing empirical studies, there can be doubts about whether these forces are sufficient for protecting investor interests. When market forces fail, there is room for fund boards to add value for investors. U.S. funds have mandatory independent directors who are empowered to be the watchdogs for the fund investors, negotiating fees with the fund management company on their behalf. This is not the case for Luxembourg funds that are established in accordance with the EU Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. This study uses a sample of Luxembourg UCITS funds and shows that, although there is no regulatory requirement, approximately half of the sample funds have appointed at least one independent board member. A survey among board members of the sample funds showed that, in the absence of the requirement to negotiate fees with the fund management company, Luxembourg boards give relatively low priority to costs, which they see as primarily the responsibility of the promoter, leaving the monitoring to market forces. This finding is irrespective of whether or not the board has (semi-) independent board members.