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The higher inherent costs of actively managed funds has caused them to underperform both passive funds and ETFs, according to research from European regulators.

The European Securities and Markets Authority (ESMA) reported that its study of active equity funds versus passive equity funds, ETFs and their benchmarks found that actively managed funds have underperformed both competitive products and their benchmarks, in net terms.

The primary cause of this underperformance, ESMA said, is “the large impact of ongoing costs” for active funds.

“Looking at net performances… active funds underperform their benchmarks across time horizons,” the report said.

In particular, the ESMA found that gross performance was “strongly reduced by ongoing costs.”

Additionally, the report noted that “returns are much more volatile than costs over time. This implies that, when gross returns are lower, a similar level of costs has a higher impact on gross performance.”

For instance, for the period from 2016 to 2018, costs ate up 29% of gross returns. Yet, in 2018, when returns were weak, “costs took out around 90% of gross returns,” the report said.

The research also noted that, while the top 25% of active funds do outperform passive funds, the active funds that make up the top 25% constantly changes, making it difficult for investors to pick those top performers on a consistent basis.

The regulators say that they will continue to look at the impact of costs and charges on investment returns as part of its investor protection mandate.