Why investors are buying cheaper investment funds
Investors. You’ve never had it so good.
New research shows that investors across Europe are paying lower expenses on average than ever before.
The research from Morningstar looks at trends in fees for a group of equity and fixed income sectors from 2013 to 2020.
They found that the average fee paid by investors was 0.69% in October 2020, down 31% since 2013.
It’s good news for investors because investment fees are a reliable predictor of future returns.
In other words, the less you pay for the management of your money, the more your long-term investment returns will be.
Hang on a second; surely, as a Financial Planner, I should be saying to you ‘past performance is not an indicator of future returns’? Shouldn’t I?
Here’s the thing; academic studies show us that low-cost investment funds have greater odds of a) surviving, and b) outperforming their more-expensive peers.
This is why one of the fund selection criteria I use when selecting funds to recommend to our clients is…you’ve guessed it…low cost.
Back to this research then.
Morningstar studied 10 equity categories, mixing broad global and single country exposures, and 2 fixed income categories.
They chose these categories because they are core market exposures that make up a large proportion of the holdings we might expect to see in a well-diversified portfolio.
And as I mentioned at the start of the video, fees are coming down.
Down by nearly third, in fact, 31% down since 2013, to reach an average of 0.69% in October 2020.
The average fee charged by industry, represented by the equal-weighted average across all funds for the categories analysed, was 1.17%, which is down 19% since 2013.
When Morningstar talks about the average fee charged by industry, they are talking about a combination of three fees – what you pay for the fund, what you pay for the platform, and what you pay for advice.
Of course, you can go it alone as a DIY investor, and save on the cost of advice, but as my last video shows, you also give up the benefits of advice – value that adds up to an average of 3% of net investment returns a year.
Why are investment funds fees falling?
Unsurprisingly, it’s largely due to the growing popularity of index tracker funds.
Morningstar isolated the cost of passive or index trackers since 2013 and found they had fallen in price, on average, by 30%, compared to a 17% cut for actively managed funds.
Come on active funds, you need to do better!
Another interesting finding in this research is that flows into funds and share classes the lowest fees in their category have consistently outpaced flows into the most expensive fees.
If I was a fund manager reading this report, and I wanted to attract more cash from investors, I would cut my fees. Simple as that.
But Morningstar also found some evidence that, within the cheapest part of each fund category, there is migration from active to passive funds.
Investors are finding the cheapest active managed funds, and then thinking, stuff it, I’ll switch into an index tracker instead, and save even more money. Smart investors.
The ever-popular ESG – Environment, Social, Corporate Governance – funds are also getting cheaper.
The asset-weighted average fees charged by ESG funds were 0.57% in October, compared to 0.71% for non-ESG funds.
Historically, ‘green’ investment funds were thought to be quite pricey, but this study shows what we’ve known for many years now, which is ESG funds don’t typically levy a premium over standard investment propositions.
In the same way that investment returns compound over time, what Einstein allegedly referred to as the 8th wonder of the world, so do fees.
The fees you pay for investing money compound over time and those fees diminish your returns.
The only guaranteed way to improve your return from investing is to pay lower fund management expenses.