Apparently, Esma’s initial findings about the sheer loss of gross returns to fees were shocking enough for it to assess the reporting of costs and past performance of retail investment products by asset managers, “in order to increase investors’ awareness of the net return of these products, and the impact of fees and charges.”
Asset managers, brace yourself
It’s time for asset managers to brace themselves: the competition from passive solutions has been putting downward pressure on fees over the past few years, resulting in lower margins. Regulators have so far been reluctant to turn up the pressure. This was exemplified by Esma refusing to name the funds it had identified as “possible” benchmark huggers last year, and Luxembourg’s regulator claiming last summer there were no benchmark hugging funds among the 4100 Ucits funds domiciled there.
But this new Esma initiative may very well mean the pressure on active managers will from now on come from the regulators too. As the EU embarks on its next phase of integration, it is more than keen to show to its often-sceptical citizens that it works to their benefit, and not to that of big business.
The multi-asset and unconstrained bond space are the areas that have seen most investor inflows, and have escaped competition from passive managers. They also charge fees that are typically higher than those charged for equity funds, even though returns are lower. Multi-asset funds, for example, escaped scrutiny in Esma’s initial study.
The average management fee for a ‘flexible allocation’ fund is 1.26% according to Morningstar. This compares to a management fee of 1.19% for European equity funds and 0.66% for European corporate bond funds. Gross returns for multi-asset funds, however, are closer to those of bond funds than of equity funds.
Expect Esma to pay some attention, perhaps unwanted attention in some quarters, to multi-asset fund charges over the coming months and years. After all, these are the kinds of funds most popular with the consumers the regulator has vowed to protect.