Lower fees not a driver of fund flows: Morningstar

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Lower fees not a driver of fund flows: Morningstar

Lower fees have had little impact on global fund flows over the past decade other than in the US, research from Morningstar has suggested.

The study, entitled ‘What Factors Drive Investment Flows?’, found that investor preferences for low-cost funds are “virtually non-existent outside the US.”

This contrasted with a “very strong” preference for cheaper products in the US market, according to the study.

“We find that from the period mid-2003 to the end of 2014, US equity funds with a higher-than-average net expense ratio experienced -0.93 per cent flow growth per month,” the report said.

“On the other hand, global markets ex-US only saw an aversion to fees at a pace of -0.11 per cent a month during the period 2008-14.

“Cross-border and European marketplaces were especially agnostic, with 0.02 per cent and -0.04 per cent respectively.”

In the UK, this difference may partly be explained by the fact the Retail Distribution Review, which ended commission payments on new business, did not come into force until 2013.

By contrast, the study acknowledged flows into US passive investments had “far [outstripped] their active counterparts” as expense ratios across all US funds fell from 0.76 per cent in 2009 to 0.64 per cent in 2014.

Even within US active funds, Morningstar found those vehicles in the cheapest quintile received approximately 95 per cent of the estimated new net flows from mid-2003 to 2014.

According to the report, the divergence between US and non-US funds was also apparent in fixed income. US bond funds with higher than average costs were hit by outflows of 0.9 per cent a month from mid-2003 to 2014, while global ex-US fixed income funds experienced outflows of 0.07 per cent from 2008 to 2014.

Morningstar added: “The conclusion is that US funds seem especially pressured to lower costs in order to attract assets, but non-US-domiciled funds have not yet felt this same pressure.

“Any differences observed in flows between low-cost and high-cost funds ex-US identified through aggregations are more likely to be connected to other fund-specific characteristics.”