The European Securities and Markets Authority (ESMA), the EU securities regulator, today publishes its third annual statistical report on the cost and performance of European Union (EU) retail investment products. In the report ESMA finds that the costs of investing in key financial products, such as UCITS funds, retail alternative funds, and structured investment products (SRPs) remain high and diminish the investment outcome for final investors.
Clear and understandable information about the impact of costs on the returns that retail investors can expect to receive is key to allowing investors to make informed investment decisions. Ensuring this information is made available is a key element in meeting ESMA’s investor protection objective.
The main findings in the report are the following:
Fund costs: UCITS costs only marginally declined over time. For one-year investments they were 1.4% in 2019 compared to 1.5% in 2018 on average across asset classes;
Volatile returns: Average gross UCITS fund performance depends on market developments and varies significantly over time. It amounted to 7.7% in 2019, while it reached no more than +0.2% in 2018 for a one-year investment. The market impact of COVID-19 falls outside the reporting period;
Retail investors: Retail clients pay on average around 40% more than institutional investors across asset classes. A ten-year investment of EUR 10,000 in a portfolio composed of equity, bond and mixed funds led to a gross value of around EUR 21,800 and EUR 18,600 after costs. Around EUR 3,200 in costs were paid by the investor;
Risks: Higher risk exposures entailed higher costs irrespective of the asset class;
Active and passive funds: The evidence on cost structure showed that costs were higher for active equity and bond UCITS compared to passive and UCITS ETFs, ultimately implying net underperformance of active equity and bond UCITS, on average, compared to passive and UCITS ETFs. Top-25% active equity UCITS overperformed compared to the top-25% passive and related benchmarks, at shorter horizons. However, the cohort of UCITS changes over time making it complicated for investors to consistently identify outperforming UCITS;
ESG funds: ESG outperformed non-ESG equity UCITS mostly due to sectoral factors. According to the evidence, actively managed ESG funds showed lower costs than non-ESG, not supporting the view that there is systematic greenwashing by ESG funds;
Retail AIFs: Retail AIFs, similar to UCITS, showed high return volatility. While being negative in 2018, gross annualised returns in 2019 were 12% for Fund of Funds (FoFs) and 9% for the residual category “Others” that includes investment primarily focused on equity and bonds. Net returns confirm what has been observed for gross returns, being 11% for FoFs and 7% for Others;
SRPs: The analysis on costs and performance scenarios for SRPs showed that total costs were largely attributable to entry costs and varied substantially by country and payoff type. Moreover, there was little difference in simulated returns between moderate and favourable performance scenarios; and
Transparency: There is limited comparability across Member States. Heterogeneity and data availability issues persisted, as well as lack of harmonisation in national regulation.
This report aims at facilitating increased participation of retail investors in capital markets by providing consistent EU-wide information on cost and performance of retail investment products. It also demonstrates the relevance of disclosure of costs to investors, as required by the MiFID II, UCITS and PRIIPs rules and the need for asset managers and investment firms to act in the best interest of investors, as laid down in MiFID II, and the UCITS and AIFM Directives.
Next steps
EIOPA has also published today its report on insurance-based investments products and personal pension products. A joint ESMA-EIOPA event to share the findings of both reports will take place on 21 April 2021. During this webinar you will see a presentation of the reports, which will be followed by a Q&A session.
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The European Securities and Markets Authority (ESMA), the EU’s securities and markets regulator, has published the interim simple, transparent and standardised (STS) notification templates for synthetic securitisations following amendments to the Securitisation Regulation (SECR).
The interim templates allow originators to notify ESMA of synthetic securitisations that meet the STS criteria.
The amended SECR was published in the Official Journal of the European Union on 6 April and enters into force today. The amended SECR extends the STS framework to synthetic securitisations. As with traditional securitisations, only those synthetic securitisations that meet pre-defined STS requirements will be published on ESMA’s website.
Until the date of the application of the Regulatory Technical Standards (RTS) specifying the content and the format of STS notifications for synthetic securitisations, originators can make the necessary information available to ESMA in writing during the interim period. ESMA makes available, on its website, interim STS synthetic notification templates that originators can use to ensure consistency across all STS notifications.
The interim STS notification templates may be used by originators on a voluntary basis which may be subject to possible changes following the entry into force of the RTS.
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The SME GMs regime in the EU, as it stands, has been relatively successful, with seventeen multilateral trading facilities (MTFs) registering as SME GMs to date. However, acknowledging that SMEs need further incentives to access capital markets, the report suggests targeted amendments to the SME GM regime in the MiFID II framework, aimed at simplifying investors’ access to information and promoting concentration of liquidity on SME GMs.
Among the proposed measures the Final Report includes recommendations to help promote the concentration of liquidity on SME GMs, to improve standardisation and access to information for investors and suggestions on how to develop homogeneous admission requirements.
ESMA is aware of the wider ongoing discussion to make capital markets more efficient for SMEs in the context of the Capital Market Union and fully supports the initiative. It is ready to contribute to this wider discussion with technical input if and where needed.
Next Steps
The report was submitted to the European Commission and is expected to be taken into consideration for further legislative proposals on the MiFID II SME GM regime.
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WebinarWithin the European financial sector, investment funds are more exposed to climate-sensitive economic sectors than banks, insurers and pension funds. However, few investment fund climate-related financial risk assessments have been conducted. ESMA has made a first attempt to fill this gap, using a data set of EUR 8 trillion of European investment fund portfolio holdings. Funds whose portfolios are tilted towards more polluting assets (brown funds) distribute their portfolio over a larger number of companies than funds with cleaner portfolios (green funds).
This apparent diversification hides a concentration risk: brown funds are more closely connected with each other (have more similar portfolios) than green fund portfolios, which tend to ‘herd’ less (have less similar portfolios to those of other green funds). This suggests that widespread climate-related financial shocks are likely to disproportionately affect brown funds. This is confirmed by a preliminary climate risk asset valuation exercise included in ESMA TRV No 1 2021.
During the webinar you will see a presentation of the article and its findings. The presentation will be followed by a Q&A session.
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The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has today updated its Questions and Answers regarding market structures issues under the Market in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).
ESMA has introduced changes to one of its Q&A on tick sizes to reflect the amendment introduced in Article 49(1) of MiFID II which excludes Large in Scale transactions from the mandatory tick size regime.
The purpose of ESMA’s Q&As on market structures issues is to promote common supervisory approaches and practices in the application of MiFID II and MiFIR. They provide responses to questions posed by the general public and by market participants in relation to the practical application of level 1 and level 2 provisions to transparency and market structures issues.
ESMA will continue to develop these Q&As in the coming months and will review and update them where required.
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