Luxembourg last year remained among the most expensive domiciles for investment funds in Europe in all three investment categories, according to a research report released on Monday by the European Securities and Markets Authority, Esma.
Costs remained very heterogeneous among EU member states, Esma said. Similar to previous editions, funds domiciled in the Netherlands and Sweden exhibited the lowest total costs. The authority calculated that at a one-year investment horizon, the difference of costs between the most expensive and the cheapest jurisdiction ranges from 90 basis points in case of bond funds to 160 basis points in case of equity funds.
Luxembourg, according to Esma’s research, was among the four most expensive member states for all three different asset classes: equities, bonds and mixed funds. In equities, the other three most expensive countries were Italy, Austria, Portugal. In bonds, Luxembourg ranked among Italy, Ireland and Portugal, and for mixed funds, the Grand Duchy found itself among Ireland, Italy and Belgium.
In its overall analysis of the costs of investment funds, Esma said it found that the average cost of retail investment products declined but that significant differences across EU member states remained.
Investors paid around an average 2,000 euro in costs for an investment in Ucits of 10,000 euro over ten years. The returns of the market led to a net value of 14,850 euro after this period, and to a net real value of 13,500 euro, when inflation is taken into account, Esma calculated.
Key determinant
“Costs and performance are key determinants of whether retail investors benefit from their investments, and whilst it is to be welcomed that the cost incurred by investors has slowly declined, retail investors still need to consider costs carefully in their investment decisions,” Esma chair Verena Ross said in a press release.
“In 2022, investors were faced with a difficult environment characterised by lower returns and elevated level of inflation, accentuating the importance of the level of costs,” Ross said. ”Clear, comprehensive and comparable information on retail investment products can help investors assess the past performance and costs of products offered across the EU and assist them in making well-informed investment choices.”
Esma found that costs of investing in Ucits funds, widely regarded as the main vehicle for a common investment fund in Europe, have declined, but investors should continue to consider fund fees carefully in their investment decisions. Despite costs of active equity funds decreasing, Esma noted that this category of funds remained more expensive than passive funds and ETFs, such that their net performance was on average lower in comparison.
Luxembourg is the legal home for approximately one third of all Ucits funds in Europe.
‘Dissimilarities’
Drivers behind the “dissimilarities” between EU member states include differences in distribution channels and costs, Esma said. The supervisor noted that the country ranking did not significantly change if the ranking were determined on the basis of ongoing costs instead of total costs.
Among investment professionals, Luxembourg is known as a relatively expensive domicile. The country’s financial supervisor CSSF last year embarked on a review of the cost structures of investment funds and a closer analysis on the costs of Luxembourg funds by Morningstar also has shown that Luxembourg is more expensive than Ireland, France and Germany when it comes to actively managed, open-ended bond funds.
A more recent study by Morningstar found that timing the market with fund investments can be costly especially if you are a cross-border investor using Luxembourg-domiciled mutual funds. Some 27 percent of the total return in your portfolio - nearly one third - could be at risk, according to an analysis by data specialists at Morningstar.
Esma earlier this year called for additional EU legislation to prevent investment fund managers from charging ‘undue costs’ to investors.