Esma acknowledges that further research is necessary to obtain a more complete picture of the costs of European investment funds. The European regulator made this statement following criticism from industry association Efama regarding a recent Esma report on these costs.
In that report, Esma stated that there are significant differences in the cost structure of American and European investment funds. US mutual funds were found to be considerably cheaper to invest in than European Ucits, which does not benefit the competitiveness of European funds.
However, Efama disagrees with this conclusion and argues that American investment funds are not necessarily cheaper than Ucits. The industry association calculated that the average costs for active and passive equity funds in the European Union stood at 1.04 percent and 0.27 percent, respectively, at the end of 2022. These costs for American active funds were 1.14 percent and for index trackers ranged between 0.47 and 0.55 percent—significantly higher than their European counterparts.
When considering the total cost of ownership, including distribution and advisory costs, actively managed Ucits are generally cheaper. “The total costs for American active funds are only lower if advisory costs are less than 0.59 percent per year,” Efama stated.
Larger size, lower costs
Efama, like Esma, recognises that average costs, when measured by fund size, are significantly lower in the US than in Europe. However, according to Efama, this is mainly because many mutual funds are used for pension purposes. As a result, these funds fall into an institutional category, where entirely different pricing agreements apply compared to retail funds. This leads to lower costs for American funds.
“There is often a claim that American funds are consistently cheaper than Ucits due to their larger size,” said Efama’s General Director, Tanguy van de Werve. “However, when we delve deeper into the figures, it becomes clear that it is crucial to examine the cost structure and context to make a fair comparison between American and European funds.”
In response, an Esma spokesperson told Investment Officer that comparing costs by fund size was a logical choice for the regulator’s latest report. “However, it is also possible to look at total costs, as Efama has done.”
The spokesperson added that both Efama and Esma reports lead to a similar conclusion—namely, that funds with a larger size generally have lower costs, and that European funds are, on average, significantly smaller than American ones.
Further research
The regulator acknowledges that Efama has gone much further in its research into fund cost differences by also considering distribution costs. “Esma has not yet examined distribution costs due to a lack of available data,” the spokesperson said. “We are now working with authorities to collect this data.”
Esma intends to incorporate the assessment of this new data into a more comprehensive market report this year, covering the costs and performance of European investment funds. The regulator expects this report to provide new insights into fund costs.