One of the key objectives of the Capital Markets Union (CMU) agenda is to increase the level of retail participation in capital markets. Achieving this goal is expected to provide EU companies, and the EU economy in general, with much needed long-term capital and speed up the green and digital transition. It will also serve the interests of people whose savings in bank deposits are currently being eroded by inflation in an environment of very low interest rates.
Most European households do not save directly in capital market instruments. The main reason for this is that many people are risk-averse and unaware of the potential returns generated by investment in securities and investment funds. The emphasis put by prominent stakeholders and authorities on the negative impact of costs on the return that retail investors can expect to receive from investment products, whilst not emphasising the benefits, also tends to undermine consumer trust in these products.
This Market Insights aims at raising people’s awareness of the advantages of investing in capital markets by highlighting the extra return UCITS have delivered compared to bank deposits over the last ten years. We also provide strong evidence that the cost of UCITS is on a downward path.
Performance of UCITS
To encourage people to save in capital markets, we need to put a much stronger emphasis on the net returns generated by market-based instruments over the long term. We need to explain that there is an opportunity cost of holding an excessive amount of wealth in bank deposits, which has meant a negative return since 2016, thus weakening people’s long-term saving prospects, such as their standard of living in retirement.
Gross versus net performance. If we want retail investors to invest in capital markets, we should highlight the outcome of long-term investing rather than focusing on annual performance for one year investments. The following analysis looks at the performance of UCITS over the ten-year investment horizon ending in 2019, using data published in the latest ESMA Annual
Statistical Report. The chart below shows the gross annual performance and total costs2 of the three main types of UCITS (equity, bond and mixed) as well as the average interest rate paid on overnight deposits and deposits with agreed maturity of over one and up to two years, during the period 2010-2019. The annual gross performance was between 11% for equity UCITS and 5.1% for bond UCITS, whereas the average interest rate paid on bank deposits was 0.5%. This means that the total gross performance over the entire period is 184% for equity funds, compared to 5% for deposits.
Annual Gross Performance and Total Costs
Source: EFAMA’s calculations based on ESMA data
We have also calculated the average net performance of UCITS investment over the period 2010-2019, taking into account the impact of inflation on the final performance for an investor. The findings – as shown in the chart below – highlight the benefits long-term investment investors can hope for. On average, the net annual performance of equity, bond and mixed UCITS was 7.6%, 2.3% and 3%, respectively. These positive returns contrast with the 1% loss recorded on bank deposits.
Source: EFAMA’s calculations based on ESMA data
Conclusion
The main conclusion of our analysis would remain valid if the investment horizon were extended to 2020. Indeed, despite the financial stress caused by the Covid-19 pandemic in March 2020, the net performance of equity UCITS was 5.3% in 2020. Bond UCITS also recorded, on average, a positive net return in 2020, albeit small. It is important to note that not all equity UCITS are the same. Whilst all are predominantly invested in stocks, they can differ according to their investment strategy, which may focus on one market sector, investment theme, or geographic region.
