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Equity fund fees have dropped by a quarter since RDR, but passive leads the way with fee cuts, says Morningstar study


Passive managers continue to lead the price war by cutting fund fees at a faster rate than active managers, according to a report from Morningstar.

The report found that since the introduction of the Retail Distribution Review (RDR) in 2013, despite starting from a lower point, passive equity funds cut fees by nearly a third (28 per cent), compared to less than a fifth for active equity funds (18 per cent).

The report from Morningstar analysed the effects of RDR on fund fees for UK investors. It looked at a representative sample of actively managed and passively managed open-end equity and fixed income funds domiciled in and available for sale in the UK, or those which are domiciled in Ireland or Luxembourg and have reporting status, and exchange-traded funds that are domiciled in Europe and available for sale in the UK.
The report found that despite aggressive price cuts in the equity fund market, fees have come down in fixed-income funds but to a lesser degree. The average fee for actively managed bond funds fell by 10 per cent since 2013, while passive fees fell by just 4 per cent. The contrast with the equity market is likely attributed to the slower pace at which passive providers have adopted fixed income products and the lack of competition in the market.

The biggest drops in fees were in passive funds investing in US equities, global emerging-markets equities, and global large-cap equities; passive fund fees in these categories fell by 50 per cent, 37 per cent, and 36 per cent, respectively.

Fee reductions in clean share classes of active funds were significantly lower than those at passive funds and mainly in single figures only. 

From just over a quarter of assets in 2013, passive now accounts for more than 40 per cent of equity fund investments, across the sample of funds surveyed. The trend was even more pronounced in fixed income, which went from an 80:20 split in favour of active to nearly 50:50
The report also showed the absence of a significant fall in assets in bundled share classes. The Financial Conduct Authority (FCA) issued its final guidance unbundling in April 2018, but concern remains that financial advisers and asset managers alike will be slow to act in switching assets into clean share classes. They may wish to keep those legacy assets in bundled share classes for as long as possible, where their slice of the fees is obscured.
Jose Garcia-Zarate (pictured), Associate Director, Manager Research, at Morningstar, says: “There is no doubt that the RDR has influenced the marketplace positively. There is greater transparency of fees for the investor and this has brought to the fore the issue of the assessment of value at a fund level. However, there remains much work to be done for all retail investors to benefit fully from the legislation.
“Passive funds have driven increased competition into the equity market resulting in a price war between active and passive funds, but the market still has further to go, particularly in fixed income. Additionally, many investors remain in expensive bundled share classes, which are eating into their returns. We hope that now the FCA has issued its guidance on the outstanding issues, those legacy assets can start to move to clean share classes, in the best interests of those investors.”

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