There is still a significant impact on investment returns for retail investors due to costs that are on average 40% higher than for institutional investors, Europe’s financial watchdog says.
The costs paid by retail investors are “significantly higher” than those paid by institutional investors, leading to lower net returns, said Steven Maijoor, chair of the European Securities and Markets Authority (Esma), in the regulator’s second annual statistical report on the cost and performance of EU retail investment products.
Average fund performance amounted to “no more than” 0.2% in 2018, the report says, while they were 8.3% in gross terms for 2017.
Fund costs, on the other hand, remained broadly stable and only marginally declined over time. Costs were 1.5% in 2018 compared to 1.6% in 2017.
Based on the 40% average higher costs for retail customers, a hypothetical ten-year retail investment of €10,000 in equity, bond and mixed funds provided a net return of around €16,160 for the period 2009-2018, with costs amounting to around €2,800.
Although actively managed Ucits funds saw gross outperformance over passive and ETF funds, the difference was not high enough to compensate the higher costs charged by active funds, says the report. Average costs were higher than 1.5% for active equity and hovered around 0.6% for passive and ETFs, according to available data.
Discrepancies between member states cause problems with data, said ESMA.
Retail alternative investment funds had no data available for costs but gross returns were found to be negative for the types of these funds with large retail investor shares: -2.1% for funds of funds and -3.3% for the category Other.
This reflects the poor performance observed across asset classes, especially at the end of 2018. The Covid-19 pandemic means fund investors should be prepared to see significant negative impacts on their portfolios, Esma said.
Maijoor said: “Today’s report highlights the continued need for retail investors to be provided with clear information about the impact of costs on the returns they can expect to receive, allowing them to make informed investment decisions.”
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