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Lettres d’opinion

To ADVISOR.CA – ESMA analysis is fundamentally flawed

26 octobre 2017

Your article, Mutual fund fees decrease returns: ESMA report (October 25, 2017) repeats the conclusions of a recent European Securities and Markets Authority (ESMA) report that “ongoing fees and one-off charges and inflation reduce” returns “available” to investors. The article should have also pointed out that the logic of this analysis is fundamentally flawed. On fees, the report is simply comparing gross fund returns with fund returns net of fees and reporting the relative difference in percentage terms, implying that investors are missing out on a return they would otherwise have received.

While it is of course true that fees and charges, as well as inflation, reduce investor returns, it should be asked how it is that the returns gross of fees and absent the effect of inflation should be “available” to investors. Stated another way, it is misleading to suggest that fees and inflation are avoidable or that investors are entitled to returns in the absence of these realities. The report also makes much of the fact that certain market segments were more strongly affected than others by fees and charges. For example, the report states that bond fund investors “lose on average a higher share of the available gross profits”. However, ignoring for a moment what is meant by “available gross profits” the relative difference in returns is more a function of the lower absolute returns achieved by bond funds relative to equity funds. As we all know, the relative decrease from 5 to 4 is larger than the relative decrease from 15 to 14.

Finally, the report suggests that investors are only “weakly” sensitive to cost and performance when allocating capital; however, the report also acknowledges that this analysis was hampered by using net flow data, rather than gross sales and redemptions.

Ian Bragg
Director, Research and Statistics
The Investment Funds Institute of Canada

Published October 26, 2017