PA ANALYSIS: Fund fees wipe out ‘20% of gross returns’

The European Securities and Markets Authority (Esma) is turning up the heat on asset managers, highlighting the impact of fund charges on returns in a fresh report. Fund fees wipe out an average 20% of gross returns, according to the regulator

burning money – one hundred euro banknotes


Esma found that fees included in the total expense ratio (TER) reduce gross returns of EU-domiciled funds by an average 13%. When sales and redemption fees are added, “gross returns on EU mutual fund shares are reduced by 20%”.

Fees reduce returns by 15% for retail equity funds, and 10% for institutional funds. But bond fund investors forego a much larger share of their profits, despite fees on bond funds being substantially lower. But the generally lower returns in this asset class mean the impact of fees on returns is a lot higher: investors in institutional share classes of bond funds lose 17% of their gross returns, but investors in retail funds lose an average of 32%.

Lack of fee awareness

The Financial Conduct Authority (FCA), the UK financial regulator, published a study last summer showing fund fees do not correlate with gross performance. Moreover, it found a slight negative correlation between gross returns and performance in two of the three asset classes it examined.

Esma also noted that “the impact of fees and charges on the net outcome to investors does not seem to be reflected in investor choices”.

While the FCA found that performance is uncorrelated with fees, Esma concluded that fund flows are not correlated to fees either, when corrected for performance, with the exception of retail bond funds, commodity funds and money market funds.

This conclusion is debatable, however. After all, the rise of ETFs as alternatives to active funds has a lot to do with ETF fees being lower, especially on the equity side.

Nevertheless, Esma has now received a mandate from the European Commission “to issue recurrent reports on the cost and past performance of the main categories of retail investment, insurance and pension products,” it announced on Friday.

The regulator noted that situations of low gross returns and commensurately high relative fees “are more likely to occur in the current low interest rate environment, reinforcing the vulnerability of investors to low performance by their investments in the fund industry”.

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