Sunniva Kolostyak: Are multi-asset funds cheaper in the UK than in Europe? Well, to find out, I am joined by Tom Mills, our principal of multi-asset strategies.
Tom, you found that funds in the UK have a median lower cost than in Europe. Can you talk through some of the findings from your report?
Tom Mills: Hi, Sunniva. Yeah. So we’ve been doing a study of trends in multi-asset in the UK and in Europe. So focusing on multi-asset and what we call allocation funds. And that’s right. So we find that median costs are significantly lower in the UK than on the continent.
There’s a couple of reasons for that. One would be regulation. So in the UK there’s been regulation that has encouraged or pushed towards lower costs. And as a result, there’s been more availability and more take up of lower cost funds. On the continent, it’s not quite the same picture. So for example, on the distribution side as well, there might be more bank-led distribution models where for example banks might promote their own products and with commissions being permitted, advisers may be using higher-cost multi-asset funds.
Kolostyak: So in the UK then, where are investors allocating their money? Are they actually going into these lower-cost funds as well?
Mills: So, yes, that that’s right. So one thing, if we look at the breakdown of assets within UK-based allocation funds, we see that investors have really shifted into the cheaper, lower-cost funds. So if we divide funds by cost and put them in quintiles, quite a high proportion of assets are in the lower, the cheapest two quintiles in UK allocation. In Europe that’s not that’s not quite the same case. There’s more of an even distribution of assets across the different cost buckets if you like. So yeah, there is quite a difference between the UK and the continent.
Kolostyak: So are these funds popular then among investors?
Mills: So allocation funds overall, they’ve had sort of moderate, I guess, outflows over recent years, at an overall level. But from a UK perspective, there’s been inflows into more adventurous categories that, I guess, take a bit more risk. Lower-risk categories have seen a bit more outflow in the last few years, and also flexible funds.
Higher interest rates and higher yields in fixed income probably explain that. So for example, in a flexible allocation, in the UK, GBP flexible allocation has seen very large outflows over recent years. It shrank by about a fifth in 2023 and then by about the same amount in 2024. So investors that might have more of an absolute return objective, or capital preservation objective, have shifted into cash. So those categories have certainly seen more outflow.
Kolostyak: So what about performance then? Have these funds been able to provide these investors with the returns that they would like?
Mills: So allocation funds overall, if we look at the UK and in Europe, they’ve underperformed against their Morningstar benchmarks. More so in Europe than in the UK. So UK allocation funds over ten years for example, at moderate risk level, the 40%-60% equity allocation category, the average fund has underperformed its benchmark by about 1.5 percentage points over the last decade.
In Europe, the comparable category average has underperformed its benchmark by about 2.4%. So that’s down to things like, largely fees, especially on the continent. Also strategic asset allocation, market timing and security selection. And we don’t see those trends reversing anytime soon.
Kolostyak: Well, Tom, thank you very much for joining today. For Morningstar, I’m Sunniva Kolostyak.
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