EU investors still paying higher fund charges than US peers

The European Securities and Markets Authority (ESMA) says European investors are still paying higher fund costs than US investors, despite a double-digit percentage fall in the cost of some retail funds.

The pan-European securities watchdog said the smaller size of EU retail funds relative to their US peers at least partly explained the cost difference, since the average EU fund size is around 10 times smaller than the average US mutual fund.

“EU funds do not exhaust the economies of scale commensurate with the EU’s single market. The market inefficiencies revealed by this higher cost level shows the need to focus on the competitiveness of EU markets, within a future Savings and Investments Union,” ESMA said.

Overall, 2023 saw a 5% decline in the ongoing cost of equity UCITS (undertakings for collective investment in transferable securities) funds. Bond UCITS funds saw costs reduce by 13%, ESMA said in its Costs and Performance of EU Retail Investment Products Report 2024, which was published on January 14 and covers the 2023 calendar year.

ESMA said that over a 10-year investment, retail investors paid around 2,000 euros on a 10,000 euro investment, obtaining a net asset value of 15,100 euros.

Meanwhile, the report, now in its seventh year, found that although costs for mutual funds are falling, they remain significantly higher than those charged in other jurisdictions.

Retail share

Overall, EU-based retail investors hold 6.4 trillion euros in UCITS funds and 900 billion euros in alternative investment funds (AIFs). Retail investors’ share of total AIF investments dropped from 13.8% in 2022 to 11.3% a year later, despite the fact that annualised returns to retail AIF investors rose in the course of 2023, ESMA said.

The data also highlighted that newer funds have significantly lower charges than their older counterparts, and mixed-asset and bond funds are more expensive than their equity equivalents.

ESG outperformance

Funds focused on environmental, social and governance (ESG) had lower ongoing costs than non-ESG equivalents, while exchange-traded equity-focused ESG funds also outperformed their non-ESG peers, the report showed.

A deep-dive analysis within Sustainable Finance Disclosure Regulation (SFDR) fund designations further underscored the lower costs of ESG funds. ESMA found that funds categorised as Article 6 under SFDR — that is, those with no sustainable investment characteristics — had the highest ongoing costs.