New research from the European Securities and Markets Authority (ESMA) finds that while retail investment costs are declining in the region, investment funds remain relatively pricey on a global basis, amid the market’s lack of scale.
In a report released Tuesday that reviews the costs and performance of retail investment products in the European Union, the regulators examined a sample of funds with €10.2 trillion in assets under management (AUM), finding that between 2019 and the end of 2023, the ongoing costs of equity funds declined by 5%, while bond fund costs were down 13%.
“Despite the decline in costs, active equity funds continued to underperform” passive equity funds after fees, the report said.
Passive funds’ costs were flat, while equity ETFs’ costs were down by 26.7% over the period, it noted. Balanced fund costs were unchanged.
The report also noted that fund costs remain high by international standards, which it attributed, in part, to the lack of economies of scale that are available within the region.
EU-based funds are, on average, much smaller than U.S. funds, the report said, noting that larger funds tend to have lower ongoing costs.
“The market inefficiencies revealed by this higher cost level shows the need to focus on the competitiveness of EU markets,” ESMA said.
The research also found that the size of the asset manager that operates a fund also matters, in terms of fund costs.
“The analysis shows that there is a negative correlation between the costs of a share class and the size of the parent ultimately associated with this share class,” the report said.
ESMA also reported that the ongoing costs of environmental, social and governance (ESG) funds are still lower than, or in line with, the ongoing costs of non-ESG equivalents.
“Overall, ESG funds outperformed their non-ESG equivalents in 2023, with disparities across asset classes,” ESMA said. “Equity ESG funds outperformed their equivalents, while fixed income and mixed ESG funds underperformed.”
The report also found that retail investor demand for alternative investment funds continued to decline, slipping from a 14% market share in 2022 to 11% in 2023.