At a time when market watchers and policymakers alike are focused on high inflation, research from the European Securities and Markets Authority (ESMA) finds that, over the long-term, retail investment costs are heading lower.
In its latest report on the costs and performance of retail investment products, which covers the period from 2012 to the end of 2021, ESMA found that the costs of investing in the major retail products continued to decline, albeit slowly.
Despite the downward trend, the regulators stressed that costs remain an important consideration for retail investors and negatively impact returns.
“Investors are faced with an environment of high economic uncertainty, high inflation and relatively low market performance. In this context, the high costs of certain investment products, particularly for retail investors, raise concerns about actual investment outcomes,” said ESMA chair Verena Ross in a release.
Moreover, market conditions have shifted sharply since the period covered in the report, which will also have affected returns.
The report found that actively managed investment funds “remained more expensive than passive funds and ETFs, such that their net performance was on average lower in comparison.”
For investment funds overall, the report noted that investors paid around €3,000 in costs over 10 years for an initial investment of €10,000 in a hypothetical portfolio of equity, bond and balanced funds. Net of costs, the portfolio had a final value of €18,500 after 10 years.
While inflation was low for much of this period, by 2021 rising inflation was starting to negatively impact portfolio values, the report noted.
It estimated that rising inflation cost investors another €2,000, further reducing the final value of the hypothetical portfolio to €16,500.
The report also compared the returns of ESG products with non-ESG products, finding that ESG products outperformed on average, but the results varied across asset classes.
“In 2021, equity and mixed ESG funds outperformed their non-ESG peers but the performance of ESG bond funds was lower than the performance of non-ESG bond funds,” it said.
Additionally, while ESG funds remained cheaper overall than their non-ESG peers, for equity ETFs, ESG products were more expensive than non-ESG funds, the research found.
Finally, the report noted that, while retail investment costs are declining slowly, over time these reductions add up.
For equity funds, ongoing costs declined from 1.72% in the period between 2008 and 2017 (when ESMA released its first report on the topic) to 1.57% in the period between 2012 and 2021.
For bond and balanced funds the average decline was smaller, it noted, with costs only declining by about 3.6% over the 10-year period (compared with the 9% drop for equity funds).
“Whilst the cost incurred by investors is slowly declining compared to the past years, the availability of well-designed and cost-efficient products is a key element to encourage increased consumer participation in the European capital markets,” Ross noted.