ESMA 2023 Statistical Report on Costs and Performance of EU Retail Investment Products

The European Securities and Markets Authority (ESMA) published its 2023 Statistical Report on Costs and Performance of EU Retail Investment Products. We have summarized the most important aspects for you. For more information, please contact our regulatory experts at PwC Switzerland - Legal

Dr Guenther Dobrauz-Saldapenna Gabriela Tsekova Philipp Rosenauer Silvan Thoma Dr. Antonios Koumbarakis Dr. Jean-Claude Spillmann Adrien Tharin

?Key takeaways:

• ESMA found that costs have declined but advised investors to continue considering fund fees carefully in their investment decisions. On UCITS, ESMA highlighted that active funds remained more expensive than passive funds and ETFs.
• With regard to ESG UCITS, ESMA found that they remained on average cheaper than their non-ESG equivalents and out performed in net terms, except with equity ETFs.
• It pointed out to the fact that funds disclosing under Article 8 of the Sustainable Finance Disclosures Regulation (SFDR) have lower total costs compared to funds disclosing under Article 9 SFDR.
• ESMA highlighted the negative impact of inflation on portfolio value started to rise in 2021 and to weigh on investors returns. It found that inflation differences across Member States, measured at the level of the fund domicile, add to the persistent and high differences in fund costs across the EU.
• AIFs remain the second largest market for retail investment and increased from EUR 700bn in 2020 to EUR 800bn. In comparison UCITS remain the largest retail investment sector in the EU with EUR 11tn in 2021.
• On structured retail products (SRPs), ESMA was of the view that costs were largely attributable to entry costs and varied substantially by country and by pay-off type. Moreover, ESMA considered that this is a critical area for monitoring and analysis in the context of investor protection due to the lack of transparency and complexity of SRPs.

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In detail:

• Investment funds: UCITS

ESMA stated that UCITS remain the largest retail investment sector in the EU with EUR 11tn and highlighted that costs have declined at a slow pace. Costs were higher for cross-border funds than for domestic, which according to ESMA is due to the heterogeneity of distribution channels and costs.

?With regard to the effect of inflation on portfolio value, ESMA stressed that the negative impact started to rise in 2021 and played a significant role on top of fund costs, reducing the net value of investments.

?Regarding cross-border sales, ESMA found that costs heterogeneities persisted across EU Member States.

?On ESG Funds, ESMA stressed that in 2021 they remained on average cheaper than their non-ESG equivalents and out performed in net terms, except with equity ETFs. ESMA added that funds disclosing under Article 8 of the Sustainable Finance Disclosures Regulation (SFDR) have lower total costs compared to funds disclosing under Article 9 SFDR.

?In terms of net performance, ESMA explained that ESG equity and mixed funds outperformed non-ESG equivalents, but ESG bond funds underperformed their non-ESG equivalents in 2021.

?ESMA found that costs for active equity and bond UCITS were higher than for passive UCITS exchange traded funds (ETF), leading to net underperformance of active funds compared to passive and UCITS ETFs.

• ?Investment funds: Retail AIFs

ESMA stated that Alternative Investment Funds (AIFs) is the second largest market for retail investment, which exceeded EUR 6.4 Tn assets in 2021, which represents an increase of 19% from 2020.

?More than than EUR 800bn was held by retail investors, which represents an increase of EUR 100bn in one year.?However, the share of retail investors continued to slightly decrease to 12.6% at the end of 2021 from 13% in 2020.

?Retail AIFs primarily focusing on traditional asset classes like equities and bonds attracted roughly half of the total AIF retail investment according to ESMA.

According to ESMA, assets invested in retail AIFs were concentrated in the type of AIFs classified as Others (47%), Real Estate (23%) and funds of funds (FoFs) (25%).?With regard to their performance, ESMA found that FoFs, Others and Rest of the Market considerably improved in 2021, displaying evidence of a recovery from the pandemic’s impacts.

?However, ESMA pointed to the fact that Private Equity funds’ performance suffered significantly, losing more than 4%, which for ESMA reveals the persistence of the underlying uncertainty in the economy.?ESMA stressed that annualised returns of AIFs offered to retail investors increased in 2021, following the subdued period related to the COVID-19 pandemic. On average, gross and net returns rose by more than: 5 to 6% for FoFs; 7-7.5% for Others.

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• Structured retail products

Structured retail products (SRPs) remain a small market in comparison to UCITS and AIF sold to retail investors, with an outstanding value of EUR 300bn in 2021. It worth mentioning that the total value of SRPs decreased to approximately EUR 330bn in 2020.

?ESMA considered that such products shall be regarded for hedging and speculative purposes. It emphasized SRPs are a critical area for monitoring and analysis in the context of ESMA’s investor protection objective due to:

• SRP’s complexity;
• Lack of transparency;
• Range of pay-off profiles,
• Associated risks and costs.

In its Report, ESMA found that:

• Total costs for SRPs are usually paid up-front?in terms of entry costs. ESMA stated that costs vary substantially depending on the country in which they are marketed and by the underlying pay-off type;
• Costs of products issued in 2021 increased for a majority of payoff types and issuers compared to products issued in the previous three years.
• Once costs were taken into account, the simulated returns for about one out of 10 SRPs were below zero even in a moderate performance scenario. For ESMA this illustrates the benefit of the requirement that performance scenarios be provided to investors in the Key Information Document (KID) in an easily comprehensible way and net of costs.
• ESMA considered that it also highlights that prospective SRP investors should:
• carefully consider their investment horizon;
• make appropriate comparisons between alternative investment products.
• Could be a significant correlation between the SRI, which is required to be produced for an SRP, and the simulated returns in more pessimistic performance scenarios: the higher the summary risk indicator (SRI), the lower the simulated returns in both the unfavourable and the stress scenarios.

ESMA stated that this provides evidence that the SRI calculation methodology used in the KID is functioning as intended from an investor protection perspective.

Next steps:

ESMA and the European Insurance and Occupational Pensions Authority (EIOPA) will share the findings of their reports in a webinar on 2 February 2023.