Independence and focus of Luxembourg UCITS fund boards

The investment fund governance frameworks of the U.S., the largest fund domicile globally, and Luxembourg, the second-largest domicile, differ significantly. U.S. funds have mandatory independent directors and these directors are empowered to be the watchdogs of the fund investors, negotiating fees with the fund management company on their behalf. This is not the case for Luxembourg funds, established in accordance with the E.U. 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. Among Anglo-Saxon fund promoters of these Luxembourg funds, the level of independence is higher than among continental European promoters and has increased in the past decade. In that same period, continental European promoters have decreased the level of independence of their funds boards. A survey among board members of the sample funds showed that, in absence of the requirement to negotiate fees with the fund management company, Luxembourg boards give relatively low priority to costs, which they see as an area that is primarily the prerogative of the promoter. That this is irrespective of whether the board has independent board members, is consistent with earlier quantitative research, that did not provide consistent evidence that funds with more independent boards have lower costs.