How Fund Fees are Falling

European investors are paying less in fees, on average, than ever before. How is that affecting their investment choices? 

Jose Garcia Zarate 14 December, 2020 | 8:59AM
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European investors are paying less in fees, on average, than ever before. A new study analyses trends in fees for a group of equity and fixed-income investment categories from 2013 to 2020 and finds that fund charges are falling.

The study looked at the ongoing charge, a figure which measures the fee investors pay for their funds including many of the underlying costs such as trading and administration. It found that the average fee has dropped by 31% since 2013 to its current level of 0.69%.
Exhibit 1:

The decline in fees is a big positive for investors. Research has demonstrated time and again that the fees you pay are a huge factor in determine the returns you will achieve. Low-cost funds generally have greater odds of surviving and outperforming their more-expensive peers. This is because fees compound over time and eat into returns.

While active and passive funds both saw their fees falls, it is passive funds that have led the charge. For example, the asset-weighted average fee for passive funds dropped by 44% from 0.35% to 0.19% between 2013 and 2020. Meanwhile, fees on for active funds fell by 18% from 1.37% to 1.12% over the same period.

Fund fees

These have been years of strong growth for the passive fund industry and providers have been engaged in a competitive fee war. Meanwhile, the decline in fees in the active fund space has been largely driven by net outflows as investors have wised up and flocked from expensive to cheaper clean share classes or into low-cost tracker funds.

Indeed, since 2013 investors have shown a clear preference for lower-cost propositions within the categories we analysed. The sum of flows into funds and share classes charging fees that rank within the bottom quartile of their category have consistently outpaced flows into funds and share classes in the more-expensive quartiles. But even within the cheapest-fee quartile, there is evidence of migration from active funds to passive ones.

ESG Investing and Fund Fees

Acknowledging the increasing popularity of ESG investing, our study also analysed fee trends between the cohort of ESG and mainstream funds. One of the main questions that investors pose is whether choosing ESG funds comes with a higher price tag compared to mainstream propositions. This question is particularly relevant for the group of investors who remain unsure of whether investing sustainably means sacrificing performance.

We found that, for the group of categories we analysed, the average fees charged by the  cohort of ESG funds, both active and passive, are lower than those for the group of non-ESG peers.

In October 2020, the asset-weighted average fee for ESG funds was 0.57%, compared to 0.71% for non-ESG funds. Both ESG and non-ESG funds have seen fees fall since 2013, however. The average fee for ESG funds dropped by 42% and for non-ESG funds by 29.6%.

However, when looking separately at active and passive ESG relative to their non-ESG counterparts we found that while fees for active ESG funds are lower than those for non-ESG funds, fees for passive ESG funds are higher than those for non-ESG funds. This can be explained by the fact that many passive non-ESG funds in popular categories such as US large-cap blend equity charge rock-bottom fees. However, with flows into ESG investments growing exponentially, there are already signs of fee competition in ESG products amongst passive fund providers.

The flows picture in 2019 and 2020 for ESG is structurally biased toward funds in the more expensive quartiles. This has been particularly so in the case of passive ESG funds. This is because in cheapest-fee quartile we typically find funds which only apply basic exclusions, whereas funds that combine exclusions and best-in-class selection, and which investors now prefer, fall into the more-expensive fee quartiles.

Overall, we expect fee competition to remain a feature of the European fund market in years to come. Low-cost passive funds continue to grow market share, and this is putting pressure on active fund houses to provide more competitive offerings. This is great news for investors as they will be able to keep more of their investment.

 

Read the full European Fee Study

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Jose Garcia Zarate

Jose Garcia Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe