January 10, 2019 / 3:49 PM / 6 months ago

EU watchdog says fees swallow quarter of retail fund returns

LONDON (Reuters) - Charges swallow a quarter of gross returns from the 10 trillion euros (£9.03 trillion) invested in retail funds in the European Union, the bloc’s markets watchdog said on Thursday in its first annual report on the sector’s costs and performance.

FILE PHOTO: The LP12 Mall of Berlin shopping mall is pictured with Christmas decorations in Berlin, Germany, December 1, 2017. REUTERS/Fabrizio Bensch

Regulators want greater transparency on fees and charges to encourage customers to shop around.

“Our report shows that fund costs are substantive, can severely impact returns, and vary strongly,” said Steven Maijoor, chair of the European Securities and Markets Authority (ESMA).

“Costs, their level and structure are relevant for investor protection, and we will monitor and assess what the evidence implies.”

About 80 percent of the costs are from ongoing management fees, creating a “significant drain” on fund performance, while exit and entry fees have a much lower impact, ESMA said.

ESMA graphic - tmsnrt.rs/2RC2UOt

The bloc is trying to create a capital markets union so that savings are channelled into stocks and bonds to raise funding for companies to grow, reducing the continent’s heavy reliance on bank loans.

Investors have been switching to so-called “passive” funds that track stock indexes rather than “active” funds that follow shares picked by asset managers and charge investors much higher fees.

Passive funds account for about 10 percent of equity funds in the EU or 240 billion euros.

In terms of gross returns, actively managed equity funds have performed slightly better than their passive counterparts. ESMA said.

However, due to much higher charges on active funds, the net annual returns are similar for both types of funds over a 1-3 year horizon, and better for passive funds over longer periods, the watchdog added.

Reporting by Huw Jones; Editing by Kirsten Donovan

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