Dear Santa,
My first Christmas wish this year is that 2021 will be the year in which we will beat the coronavirus pandemic. I would like to send you some requests from European investors in funds and ETFs.
Shine a Light on Fees
Firstly, while we should welcome the fact that the European Mifid 2 regulation has brought a step forward in terms of transparency of fund costs for European investors, there is still much room for improvement.
I still see many fund companies who have not disclosed their transaction costs or the costs arising from external analysis to build their portfolios. While this is certainly a small cost compared to the management fee, it is nonetheless an expense that directly affects product performance and as such the consumer has a right to know how much they are being charged for these services. If you could put pressure on fund companies to report these costs that would be welcome.
Force Fees Down Further
Secondly, it should also be remembered that although the European market is a large market, there are still significant inefficiencies in the region. The latest Morningstar report on investors´ experience worldwide, the Morningstar Global Investor Experience Study, concluded that “when we compare locally domiciled asset-weighted medians versus funds available for sale by market, it is surprising how little effect economy of scale seems to have on the global fee results. The very large pan-European marketplace does not seem to have led to reduced costs".
The other potential cause of inertia in not lowering fees may lie in the fact that funds are often sold, not bought. It would be good if you could remind the European fund companies that there is room for lowering fees. I have attached to this letter one of the illustrations from the above-mentioned report comparing the costs of equity funds worldwide.
Put Pressure on Performance Fees
Thirdly, I also see that more and more fund managers are opting to charge a portion of the management fee based on the performed obtained. I am not against this practice but it would be good if you could put some order in this field. We at Morningstar view performance-based fees favourably only when structured to appropriately align management's interest with fund shareholders.
Best practice for performance fees includes the use of an appropriate benchmark and emphasising long-term periods in measuring performance. We prefer fulcrum fees that symmetrically adjust the fund's fee upwards or downwards in the same direct proportion to any outperformance or underperformance. Finally, the upwards adjustment shouldn't be so large that it takes the fund's expense ratio well above the category average.
Brush up Those Language Skills
Fourthly, the increasing competition between passive and active funds in Europe is to be welcomed. However, I need your help to remind the local regulators that there is room for improvement in this area as well. For example, in many countries US ETFs are only available to professional investors because the fund's documents have not been translated into the local language and so cannot be distributed to the local retail investors. It is difficult to understand why the same retail investors could easily buy Apple or Tesla shares on the Nasdaq but not have access to ETFs listed on the same market.
Finally, I would also like retail investors’ access to clean share classes (i.e. classes that do not include the cost of distribution) to be more widespread than it is now.
Merry Christmas Santa, and wishing you a prosperous 2021
