Investors paying lower fund charges than ever before

Passive funds are outpacing active funds in cutting fund charges. 

Investors across Europe are paying lower fund fees than ever before, with passive funds leading the way in cutting fees.

In its first European Fee Study, Morningstar found that passive funds, those that track the up and down movements of an index, have cut charges by 31% since 2013. Active funds have also lowered charges, but not to the same extent, with a 17% reduction.

Morningstar welcomes the findings as it says low-cost funds have a better chance of outperforming.

The data provider also points out that flows into funds and share classes with the lowest fees have consistently outpaced those that are among the most expensive in their respective sectors. It also said that there is evidence of migration from active funds to passive ones, as investors are becoming more cost-conscious.

Over the past seven years, passive fund groups have been competing intensely on price, with big players iShares and Vanguard cutting charges to challenge each other’s market share. 

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While active funds have been reducing charges since 2013, there is generally less competition to lower fees. In the UK, the typical yearly fee, called the ongoing charges figure (which does not include transaction costs), is around 0.8% to 1%. In addition, unlike with passive funds, active funds tend to not pass on economies of scale when fund assets grow.

Driving the fall in active fees for UK investors over this time period was the Retail Distribution Review (RDR), which was introduced in 2013. The RDR required investment funds to provide greater disclosure on fund fees, in turn making the full cost in fees paid by investors clearer. The increased transparency stoked some competition between fund providers.

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“The decline in fees is a big positive for investors because fees compound over time and diminish returns,”says Jose Garcia-Zarate, associate director for manager research, passive strategies, at Morningstar.

“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.”

The European Fee Study looked at ongoing charges from 2013 through to October 2020 as the common measure for fund fees. All calculations were carried out at the share-class level for open-ended active and passive funds and at the fund level for exchange-traded-funds.