Fund costs, because invent inventive names, …

The downpour that hit the Morningstar investment conference (MIC) last November 6 may not have been only meteorological. The investment industry will have more contrary than favorable winds in the coming years, to put it in the words of Greggory Warren, Sector strategist of Morningstar and a great connoisseur of the main global asset managers, first of all BlackRock and Vanguard. And if we think that they are the usual discourses on the maximum systems and that Italy is sheltered because in the end neither Mifid II has managed to bring adequate transparency on the costs of financial products or to have independent consultancy models take off like in other European countries or again because the culture of savers is low, perhaps we should begin to open our eyes.

The hidden costs
Italy is in last place among the main world markets due to the experience of fund investors, with reference to commission policies. It has even deteriorated compared to two years ago, according to the Global investor experience report, while India, which shared a poor judgment, has improved, thanks to legislation favorable to savers, which provides, among other things, the prohibition of fee underwriting and a ceiling on the costs to be borne by the subscribers As stated by Davide Pelusi, managing director of Morningstar for southern Europe at the opening of the MIC, it is necessary that "greater attention be paid to the issue of 'hidden costs', because even if the commissions for asset management are decreasing, the total expenditure for final investors remain stubbornly high, as little known voices resist, sometimes inserted in fanciful categories such as, for example, the so-called 'platform commissions' ”.

Information rejected
On the other hand, the research conducted by the School of Management of the Politecnico di Milano and Moneyfarm on the final post-2018 information (mandatory by law), which involved 18 of the main Italian intermediaries and was published in early November, reveals that in most cases the indications of ESMA (European Market Supervisory Authority) and trade associations have not been fully implemented and only 28% of documents report information only on costs as prescribed by law. 56% did not use this keyword in the header and 94% used terms of not immediate understanding as inducement to communicate "payments received from third parties".

Transparency as an opportunity
Whoever opened the umbrella to take cover, can now close it. Because transparency can be an opportunity; as well as a responsibility of the savings industry. But we must be equipped and be able to read the dynamics of the sector. First of all, investors' capital continues to move towards funds and ETFs (Exchange traded fund) low price. Not only in the United States, but also in Europe, the growth rate of index funds (both listed and unlisted) exceeds that of active strategies. Compared to last year, the market share of liabilities on the total rose from 16.7% to 18.5% (in September 2019).

According to Warren, the gap between the costs of active and passive funds will continue to fall over time. But the former have an additional challenge: performance. If we compare the managers' actions with a basket of index fund, we see that the former are losers in most cases. The last Morningstar Active / Passive Barometer reveals that active instruments have beat rivals in only two of 66 equity and bond categories over the decade. The results are particularly disappointing in segments with larger assets under management, such as those specializing in large-cap securities.

Vicent factors
But active quality management does not count for hours. "We believe that companies that will be able to differentiate themselves from competitors, offer low-cost solutions through repeatable investment strategies, adapt to new competitive scenarios, putting the customer first, will have a greater chance of success," explains Morningstar strategist. Other opportunities derive from demographic changes, including the aging of the population and the growth of the middle class in emerging regions, but also from economic and regulatory ones towards more sustainable and environmentally friendly development models. Technology can become a powerful ally of asset managers to reduce costs, improve performance (think of the use of artificial intelligence or big data), and strengthen the distribution channels.

Therefore, before evoking the "black swans" we reflect. As Professor Pasquale Cirillo of the Netherlands Delft University of Technology explained to the MIC, "If I can foresee it, it is not a black swan".

Watch the interview with prof. Pasquale Cirillo (Delft University of Technology).

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