The report also highlighted the importance of clear, comprehensive information for retail investors to make well-informed decisions, especially in light of challenging economic conditions.
The European Securities and Markets Authority (ESMA) has published its comprehensive 2023 Market Report on the Costs and Performance of EU Retail Investment Products.
This report provides an insightful overview of the investment landscape up to the end of 2022, a period marked by high inflation and subdued returns. It covers various sectors such as Undertakings for Collective Investment in Transferable Securities (UCITS), retail Alternative Investment Funds (AIFs), and Structured Retail Products (SRPs), offering a detailed analysis of costs and performance.
The report indicates a continued decline in the costs of fund investments, including ongoing and one-off fees, particularly in UCITS. However, the high inflation environment poses challenges for retail investors, affecting the real value of investments. For instance, a hypothetical ten-year retail investment of EUR 10,000 in a mixed portfolio of equity, bond, and mixed assets funds resulted in a net value of EUR 14,850, but when factoring in inflation, the real net value decreased to approximately EUR 13,500.
15% decrease in both retail and institutional UCITS samples
UCITS: The largest retail investment sector in the EU, with assets worth around EUR 8.4 trillion, showed a 15% decrease in both retail and institutional UCITS samples compared to 2021. Active equity funds saw a cost decline but still underperformed compared to passive non-ETF funds and ETFs. ESG funds, while experiencing lower or similar ongoing costs compared to non-ESG equivalents, underperformed in 2022 due to the energy crisis. However, they outperformed non-ESG funds over a three-year horizon.
Retail AIFs: Retail AIFs, holding more than EUR 900 billion in assets, remained focused on traditional asset classes like equities and bonds. The market saw a slight increase in retail investment in real estate. In 2022, AIFs offered to retail investors experienced a significant decline in annualized returns due to growth concerns, inflation, and rising interest rates. A hypothetical five-year investment of EUR 10,000 from 2018 to 2022 in AIFs would yield around EUR 11,100 net, or EUR 10,100 when considering inflation.
Structured Retail Products (SRPs): With an outstanding value of just under EUR 350 billion, SRPs showed an increase in products with terms over three years. Entry costs rose in 2022 for a majority of product types and issuers. The report suggests that one in eight SRPs could yield negative returns even in a moderate scenario. A hypothetical five-year investment of EUR 10,000 in 2022 in SRPs would yield around EUR 10,800 net at maturity, varying significantly based on the scenario.
The report emphasizes the importance of clear, comprehensive information for retail investors to make well-informed decisions, especially in light of challenging economic conditions.
ESMA, along with the European Insurance and Occupational Pensions Authority (EIOPA), plans to further discuss these findings in an upcoming joint webinar titled “ESMA’s and EIOPA’s Annual Cost and Past Performance Report” scheduled for 10 January 2024.
