All fund solutions facing margin pressure, but increased competition is pushing ESG investment costs lower faster.
ESG-themed funds are now typically cheaper than non-ESG funds for European investors, according to a new study by Morningstar, which shows that all fund products are feeling the effects of margin pressure.
Analysis of fees across active and passive funds in 12 categories found that the asset-weighted average fee for ESG funds was 0.57% in October 2020, versus 0.71% for non-ESG funds. In equal-weighted terms, the average fee for ESG funds was 0.93%, compared with 1.2% for non-ESG funds.
Morningstar said the growing popularity of ESG investments, both active and passive, had intensified competition. “It is important to note that our data reflects a comparatively large weight of low-cost passive funds in the ESG cohort of some of the most popular categories that we analysed,” the report said.
Partly due to competition, fees have fallen faster for ESG funds than non-ESG funds, with passive funds experiencing the steepest decline. In asset-weighted terms, the average fee for ESG funds has tumbled by 42%, slipping by 29.6% for non-ESG funds. In equal-weighted terms, the average fee for ESG funds fell by 29% and for non-ESG by 17%.
On average, fees for active ESG funds are lower than those for non-ESG funds, said Morningstar, while fees for passive ESG funds are higher than those for non-ESG funds, largely a function of many passive non-ESG funds in popular categories charging very low fees.
Global inflows into sustainable funds grew 14% in Q3 2020, with net purchases worth US$80.5 billion, while supply reached a record high of 166 new fund offerings.
Morningstar cited the growing popularity of low-cost passive funds, intensifying competition and fee-based financial advice as factors resulting in lower fees now being paid by European investors.
The average fee paid by investors has fallen by almost a third (31%) since 2013, to 0.69% in October 2020, as represented by the asset-weighted average ongoing charge across all funds for the categories analysed by Morningstar. Overall, fees for investing in passive funds have fallen by 30% over the period, compared with a 17% cut in fees of active funds. Across all investment styles, investors have consistently favoured the lowest cost options in recent years, said Morningstar.
“Since 2013, investors have shown a clear preference for lower-cost propositions within the categories we analysed. The sum of flows into funds and share classes charging fees that rank within the bottom quartile of their category have consistently outpaced flows into funds and share classes in the more-expensive quartiles,” the report said.
The study calculated asset-weighted and equal-rated fees fund share classes’ ongoing charges listed in the Key Investor Information Documents of European-domiciled open-end and exchange-traded funds (ETFs) across 10 equity and two fixed-income categories. It excluded funds and share classes for which Morningstar does not have both asset flow and ongoing charge information as well as certain share classes with negotiable fees and high minimum investment requirements available only to select large institutions.
Morningstar’s European sustainable fund universe includes European-domiciled open-end funds and ETFs claiming a sustainability objective and/or use of “binding ESG criteria” for their investment selection, but does not include funds employing only limited exclusionary screening.