The cost of funds has become anathema for the European investment industry at a time when Brussels is debating how to improve the formation of the price that investors pay for the financial products where they deposit their money.
Esma, the pan-European stock market regulator, regularly carries out a study to analyze the evolution of the commissions applied by the funds, and in its seventh edition, referring to the year 2023, the conclusion is that the cost reduction trendalthough with substantial differences depending on the risk level of the funds.
In this way, in fixed income collective investment vehicles, the total cost has fallen by 13% compared to the 2019 report, while In variable income funds, the cost has only fallen by 5%. In mixed funds and passive equity management products, the cost reduction has been more limited. The study also highlights that, despite this price reduction, the profitability of supposedly active funds has been below that obtained by passively managed funds, both indexed and ETFs.
This information is increasingly relevant due to the efforts of Brussels and regulators to try to impose more transparency on the cost of funds, at a time of strong growth in exchange-traded funds. In Europe they have already surpassed the barrier of two trillion euros of assets, thanks to the fact that savings and investment accounts based on ETFs have become popular in countries like Germany. Just last year, listed funds attracted 256.4 billion eurosthe highest level of net flows ever achieved, according to LSEG Lipper data.
And in this context of growth in automated investment, where the investor perceives that he is obtaining more performance from his portfolio at a much lower cost, thanks above all to the pull of indices such as the North American one due to the strong weight of large technological values, the issue of the cost of active funds has become an obsession, to the point that the European Commission wants to introduce comparison of the profitability of investment vehicles with indices created expressly to compare its evolution and the effect of its cost on performance.
Within the sector, the inconveniences that the construction of these indices and their operation would entail have been criticized, apart from the fact that they would tend to justify the short-term profitability data.
Much of this bad image of investment funds due to their cost is due, as the Esma report highlights, to the heterogeneity of the European market, where there is a offering more than 50,000 products with a heritage volume up to ten times lower than that of its North American peerswhich prevents the creation of an economy of scale within the sector. In fact, fixed income funds have been able to reduce their cost more thanks to the fact that they have a greater volume than variable income funds.
The report also points out the difficulty in separating the different factors that influence the price, such as transaction costs and distribution costs, which in the case of the latter complicate the comparison.
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