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Dutch researchers analysed the performance of Luxembourg and Ireland-based Ucits equity and fixed-income funds between 2008 and 2020 © Financial Times

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Retail investors are missing out on active funds’ outperformance of passives because they pay higher fees than institutional investors, new research shows.

Different fee levels mean fund share classes that are accessible to institutional investors have outperformed passives, but retail investors’ share classes have underperformed, a group of four Dutch and Belgian researchers has found.

The research paper, Fund Selection: Sense and Sensibility, is the result of analysis of the performance of Luxembourg and Ireland-based Ucits equity and fixed-income funds between 2008 and 2020.

Actively managed funds’ performance, both gross and net of costs, was compared with passive funds and index benchmarks, with results weighted by funds’ assets to reflect where most client money was held.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Active equity funds on average outperformed passive funds by 0.56 per cent a year before the impact of costs was included.

Looking at 35 separate equity fund categories — such as global emerging markets and UK large caps — the researchers found that active funds outperformed in 28 categories, or 80 per cent, although this outperformance was only deemed to be statistically significant for six of them.

This outperformance “weakened” when the impact of funds’ fees was included in the analysis.

Evidence of outperformance was “still there” for 25, or 71 per cent, of the fund categories when looking at institutional share classes after accounting for fund fees.

But this evidence is only present for 16, or 46 per cent, of fund categories when retail share classes are examined.

“Active equity managers can outperform the passive alternative when fees are reasonable,” the authors concluded.

The research is “less supportive” for active fixed-income managers, the researchers said.

“Retail investors experienced negative net outperformance due to the level of fees across fixed-income categories.”

But even for fixed income, lower fees meant institutional investors experienced positive net outperformance in three of the seven fund categories assessed.

The researchers also presented active funds’ outperformance of passives in absolute terms. By combining percentage returns with funds’ total net assets, the researchers found the average “value added” by active funds each year.

Using this approach, active equity funds on average were found to add value of €220,000 a year before fees for retail investors.

“Unfortunately, the retail investor — given the fees — could not benefit much from this active management skill since the average €410,000 in fees charged largely exceed the gross value added,” the researchers write.

As a result, average active equity funds ended up losing value for their retail clients of €190,000 a year.

This finding was not consistent across all fund categories, however, with average active funds in 15 categories, 43 per cent of the total, able to deliver positive value to retail investors after fees.

Retail share classes’ ongoing charges averaged 1.71 per cent, while institutional classes averaged 0.82 per cent across all active equity funds analysed, the research shows.

Equivalent charges for fixed-income funds averaged 1.13 per cent for retail clients and 0.47 per cent for institutions.

Ucits funds’ retail share classes are distributed across widely different geographies, most of which still allow for the payment of retrocessions, which increase the funds’ annual charges, the researchers added.

“As the ban on retrocessions becomes more widespread, we would expect [ . . .] retail fees to decrease to reflect this change,” Jan Jaap Hazenberg, one of the report’s authors, told Ignites Europe.

“They could/should eventually converge to the institutional level,” he said.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at

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