High investment fund fees can really cost you

The European fund management industry is still charging customers a fortune. Here’s how to avoid big fund fees.

930_MW_P14_Strategy

Fund managers want to smash your piggy bank

We like to remind our readers that costs matter. You can't predict the return you'll make, or be sure of how the economic backdrop will affect your investments. But you can control what you pay to invest and every penny saved on costs is an extra penny compounding away in your retirement account. This week, another report arrived to hammer the point home. The European Securities and Markets Authority (ESMA) published its first annual report into the cost and performance of "retail investment products" (investment funds, in other words). ESMA, which is a European Union (EU) financial watchdog, looked at the performance of both active and passive funds across various EU states from 2008 to 2017.

When it comes to costs, ESMA found charges were highest for equity funds aimed at retail investors (averaging around 2% a year, although charges were higher in some nations than others), with bond funds coming in at a lower (though still steep) average of 1.4%. Those charges, roughly twice as much as those paid by insitutional investors, make a big difference "on average, taking out 25% of gross returns in the period from 2015 to 2017," reckons ESMA. The UK was slightly better than the average (which was dragged up by the likes of Spain and Portugal), but still pretty drastic at just below 20%. What's also surprising is that in contrast to the US, and despite the rapid growth in competition from cheaper passive alternatives average costs across Europe had not changed much between 2008 and 2017.

Less surprisingly, passive funds (those that simply track an index) were a good deal cheaper than active funds (those that employ a human manager to try to beat an index). As a result, the passive funds beat the active funds after fees. However, actively-managed equity funds provided a "slightly better gross performance" than their passive counterparts. In other words, the quest for "alpha" (added value over and above the market) is not entirely in vain. Active fund managers are capable of beating the market the trouble is they just charge too much for the privilege.

What does it all add up to? If you want to invest in a specific market, then look for a cheap tracker fund if you want to keep things simple. If you are willing to do a bit more research in the hope of beating the market, then find an investment trust with a good track record. Trusts (not included in the ESMA study) have a better record of beating their benchmarks over longer periods of time than their unit trust rivals, and they are often cheaper too. Better yet, you can sometimes buy at a discount (ie, below the value of the trust's underlying portfolio).

Recommended

Markets may have bounced, but this is not the end of the bear market
Stockmarkets

Markets may have bounced, but this is not the end of the bear market

Stocks are back on the rise, commodities and precious metals prices are up – even the pound has rebounded. But none of this is typical of bull markets…
5 Oct 2022
What to do as the age of cheap money and overpriced equities ends
Investment strategy

What to do as the age of cheap money and overpriced equities ends

The age of cheap money, overpriced equities and negative interest rates is over. The great bond bull market is over. All this means you will be losin…
29 Sep 2022
Three ways to invest in Japanese value stocks
Japan stockmarkets

Three ways to invest in Japanese value stocks

Japanese stocks have fallen out of favour with investors, but they are looking ripe for recovery, says Max King.
28 Sep 2022
There is light at the end of the tunnel for investors
Sponsored

There is light at the end of the tunnel for investors

Investors are gloomy. But it’s not all bad, says Max King – the mood could be about to shift. You just need to hold your nerve for a little while long…
27 Sep 2022

Most Popular

Should you take a 25% tax-free pension lump sum in instalments?
Pensions

Should you take a 25% tax-free pension lump sum in instalments?

Taking out a 25% tax-free lump sum sounds appealing but it might not be the best way to manage your pension
30 Sep 2022
October’s Premium Bonds: how to check if you are a winner
Savings

October’s Premium Bonds: how to check if you are a winner

NS&I has added almost 110,000 more prizes to October’s Premium Bond draw – are you a winner?
4 Oct 2022
Section 75 refunds: protection for your credit card purchases
Credit cards

Section 75 refunds: protection for your credit card purchases

Under Section 75 of the Consumer Credit Act 1974, your credit card can give you extra protection when the goods or services you buy fall short of your…
23 Sep 2022