If you don’t find the Cumming research on mutual fund fees, flows and performance convincing, another mutual fund study has been published by the European Securities and Markets Authority (ESMA).

Read: Industry response to embedded commissions ban: IFIC and Advocis

The study analyzes mutual fund returns in relation to ongoing fees, one-off charges and inflation, with the following preliminary results:

  • a substantial reduction in net returns available to investors, especially retail investors; and
  • weak price-sensitive investment decisions by retail investors.

The paper finds that fees, charges and inflation reduced the gross returns available to investors by 29% — 252 basis points in absolute returns (from 2013 to 2015).

Relative return reductions ranged from 11% for passive equity fund shares to 44% for retail fund shares in bond mutual funds (74 to 398 basis points, respectively, in absolute returns).

Further, relative and absolute return reductions for actively managed and retail fund shares tended to exceed those of passively managed and institutional fund shares.

The second finding — weak price-sensitive investor demand — corresponds with market intelligence reported by SEI Advisor Network report. However, the aggregate finding doesn’t necessarily mean individual investors don’t care about cost, says the ESMA report.

Read the full ESMA paper.

Also read:

AUM for mutual funds industry up 1.2% in September

What’s next for PMs if the mutual fund heydays are over?

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Comment (1/2) from Ian Bragg, Director, Research and Statistics, The Investment Funds Institute of Canada: “[This article] repeats the conclusions of a recent European Securities and Markets Authority (ESMA) report that “ongoing fees and one-off charges and inflation reduce” returns “available” to investors. The article should have also pointed out that the logic of this analysis is fundamentally flawed. On fees, the report is simply comparing gross fund returns with fund returns net of fees and reporting the relative difference in percentage terms, implying that investors are missing out on a return they would otherwise have received.”

Thursday, Oct 26, 2017 at 3:37 pm Reply


(2/2) “While it is of course true that fees and charges, as well as inflation, reduce investor returns, it should be asked how it is that the returns gross of fees and absent the effect of inflation should be “available” to investors. Stated another way, it is misleading to suggest that fees and inflation are avoidable or that investors are entitled to returns in the absence of these realities. The report also makes much of the fact that certain market segments were more strongly affected than others by fees and charges. For example, the report states that bond fund investors “lose on average a higher share of the available gross profits”. However, ignoring for a moment what is meant by “available gross profits” the relative difference in returns is more a function of the lower absolute returns achieved by bond funds relative to equity funds. As we all know, the relative decrease from 5 to 4 is larger than the relative decrease from 15 to 14.

Finally, the report suggests that investors are only “weakly” sensitive to cost and performance when allocating capital; however, the report also acknowledges that this analysis was hampered by using net flow data, rather than gross sales and redemptions.”

– Ian Bragg, Director, Research and Statistics, The Investment Funds Institute of Canada

Thursday, Oct 26, 2017 at 3:38 pm