Effectiveness of independent boards of Luxembourg funds

To protect fund investors against conflicting interests with fund management companies, U.S. mutual funds have mandatory independent directors. That is not the case for funds in Europe, set-up in accordance with the UCITS Directive. Benefitting from the cross-border distribution possibilities of this E.U. legislation, Luxembourg has developed into the second largest fund domicile globally. Although it is not mandatory, many Luxembourg fund boards do have independent members on a voluntary basis. Using a sample of Luxembourg UCITS, this paper finds no consistent evidence that more independent boards have lower costs or achieve better investment performance. However, there are consistent and significant differences between fund management companies that are part of banks or insurers and independent fund management companies. Funds of the latter category have higher costs, but perform better after costs.