Morningstar today published its first European Fee Study that shows European investors are paying lower expenses on average than ever before.
The research analyses trends in fees for a group of equity and fixed income Morningstar Categories during the period from 2013 to 2020. These include 10 equity categories, mixing broad global and single country exposures and two fixed income categories. The selected categories are core market exposures that make up a large proportion of the holdings that the average European investor would have in a diversified portfolio.
This decline in fees is a strong positive for investors, as fees are a reliable predictor of future returns. Low-cost funds generally have greater odds of surviving and outperforming their more-expensive peers.
Key findings include:
The average fee paid by investors, represented by asset-weighted average ongoing charge across all funds for the categories analysed, was 0.69% in October 2020, a 31% decline from 2013. The average fee charged by industry, represented by the equal-weighted average across all funds for the categories analysed, was 1.17%, a decline of 19% from 2013.
Change in Fees
The passive fund industry has led the charge in slashing expenses, with a 30% cut in equal-weighted fees since 2013 compared to a 17% reduction among active funds. See below the equal-weighted average ongoing charge for active and passive funds for the group of Morningstar categories analysed.
Equal-Weighted Average Fees by Category
Flows into funds and share classes charging fees that rank within the bottom quartile of their category have consistently outpaced flows into funds and share classes in the more expensive quartiles. Within the cheapest fee quartile, there is evidence of migration from active funds to passive ones.
Aggregate Flows by Quartile
Aggregated Flows by Quartile and Investment Style
Average fees charged by the cohort of ESG funds are lower than those for the group of non-ESG peers. In October 2020, the asset-weighted average fee for ESG funds was 0.57%, whereas it was 0.71% for non-ESG funds. Meanwhile in equal-weighted terms, the average fee for ESG funds was 0.93%, and for non-ESG it was 1.21%. This validates anecdotical evidence showing that ESG funds do not typically levy a fee premium over standard investment propositions.
Change in Fees for ESG and non-ESG Funds
On both fee measures, ESG passive funds have seen the steepest falls.
Change in Equal-Weighted Fees for ESG and non-ESG Funds by Investment Style
Change in Asset-Weighted Fees for ESG and non-ESG Funds by Investment Style
The European Fee Study uses the KIID ongoing charge from 2013 through October 2020 as the common measure for fund fees. All calculations have been carried out at the share class level for open-ended active and passive funds and at the fund level for exchange-traded-funds.
Jose Garcia-Zarate, Associate Director, Manager Research, Passive Strategies, comments: “Investors were paying lower fund expenses in October 2020 than ever before. Our study of found the asset-weighted average ongoing charge across funds was 0.69% in October 2020, a 31% decline from 2013. Active and passive funds saw declines in fees, with passive funds leading the charge.
“The decline in fees is a big positive for investors because fees compound over time and diminish returns. The only certainty when investing is that investors must pay fees every year. The easiest way to improve one’s chances of maximising returns over the long-term is to keep a tight rein on costs.”
