In a significant market trend, European fund investors are increasingly redirecting their investments towards larger, passively managed mutual funds and ETFs, at the expense of actively managed smaller ones. This strategic shift has ignited a sustained downward pressure on costs across various fund types and strategies, according to the latest insights unveiled on Monday by the prominent European fund sector group Efama.
In its highly anticipated 2023 Factbook presentation, the European Fund and Asset Management Association revealed that both equity and bonds funds witnessed a remarkable decline in costs for the fifth consecutive year in 2023. Actively managed equity funds, in particular, saw their costs drop from 1.36 percent five years ago to 1.26 percent last year. Meanwhile, ETFs emerged as the frontrunners in this cost reduction race, with equity fund costs plummeting to 0.22 percent by the end of 2022, and bond fund costs reaching 0.2 percent.
Efama attributed this steady cost decline to two influential factors. Firstly, there has been a notable shift within the Ucits market towards larger funds, with the share of funds holding assets exceeding 10 billion euros surging from 14 percent to 18 percent over the past five years. Secondly, the market share of passively managed index funds and ETFs has experienced steady growth, cementing its role in driving down expenses.
Economies of scale
“These cost reductions can be attributed, in part, to the growing market share of larger funds, which strengthens the downward trajectory of prices, thanks to the significant cost savings achieved through economies of scale,” noted Naïm Abou-Jaoudé, President of Efama, in the factbook. “Furthermore, this cost pressure is expected to persist due to the enduring competition among fund managers and the heightened transparency surrounding fees.”
The financial landscape is rapidly transforming as investors seize the opportunity to maximize returns and optimize their investment strategies amidst this evolving market paradigm. As the popularity of larger funds and passive investment vehicles continues to soar, the industry braces for intensified cost competition and a greater emphasis on fee transparency, providing investors with a promising outlook for the future.
Active funds account for 80 percent of total net assets in Europe last year, down from 92 percent in 2012. The share of ETFs has increased to 11 percent from 5 percent ten years earlier, while index funds last year accounted for 9 percent of total net assets, more than double the 4 percent market share held in 2012.
Another notable trend is that the share of European stocks in the total allocation of Ucits equity funds has declined sharply since 2012, Efama noted, saying that this trend coincided with a growing demand for US stocks. It referred to several factors “that have made US stocks an attractive investment option for both domestic and international investors, notably the strength of the US economy”.
Strong demand for sustainable funds
Efama noted that strong demand among European fund investors for sustainable funds as “a prominent positive evolution”. Demand for funds classified as ‘dark green, heavy ESG’ Article 9 under the EU’s Sustainable Finance Disclosure Regulation (SFDR) led to an increase of 20 billion eur in net Ucits sales last, compared to 7 billion for ‘green, mid-ESG’ Article 8 funds. Article 6 funds, which have no sustainability classification, experienced 195 billion euro in outflows last year.
“Whereas Ucits in general suffered net outflows in 2022, Article 9 Ucits witnessed net positive sales every single month of the year,” said Abou-Jaoudé, who also serves as CEO of Candriam and as chair of New York Life Investment Management International. “I strongly believe that sustainable funds will continue to be successful in the future as investors increasingly prioritise ESG considerations in their investment decisions.”
The share of funds smaller than 100 million euro has halved to 4 percent over the course of the last decade. Efama said Europe is home to more than 12,000 Ucits funds with assets of less than 1 million euro. A significant part of these funds are domiciled in Luxembourg. The market share of funds with between 1 and 10 billion in assets has increased to 48 percent from 40 percent in 2012.
Alternative funds
In the market for alternative investment funds, Luxembourg last year was the only country that showed net asset growth (1.7 percent), with France, Germany, Ireland and the Netherlands showing asset declines of 4.1 percent, 10.3 percent, 13.7 percent and 29 percent, respectively. Efama said that Luxembourg accounted for the largest portion of AIF sales (51 billion euro), just ahead of Ireland (50 billion). Germany (16 billion) took third place. The large decline in the Netherlands stemmed from large pension funds switching from AIF wrappers to segregated mandates.
In terms of domiciles for AIF equity assets, Dutch pension funds helped the Netherlands obtain 26 percent market share, ahead of Germany, France, the UK and Luxembourg (10 percent).
Where are European funds domiciled?
Who is holding funds in Europe?
