Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jose Garcia Zarate. He is Associate Director of Passive Strategies at Morningstar. Hello.

Jose Garcia Zarate: Hello.

Black: So, you've been doing a big study on fees and how fees have fallen on funds, both active and passive since 2013. Do you want to give us a quick overview of what you've been looking at?

Zarate: Well, we've been looking at the trends in phase for a number of Morningstar categories, which are core holdings for most European investors. And we've been looking at the evolution of ongoing charges since their introduction back in 2012 and how they changed over the period from 2013 to 2020. And we found that there's been a significant decline in fees, both in asset weighted terms, which basically represents what investors are actually paying for the funds that they're invested in, but also an equal weighted terms, which basically doesn't take into consideration size and gives a fair representation of what the industry is charging.

Black: So, it's good news that fees are on their way down. What are the key drivers of that, do you think?

Zarate: I think there's a couple of factors that have been behind this trend. One has been a raft of regulatory changes that are seeing the introduction of clean share classes, for example, in in many countries, and we've seen a transition from – in flows, particularly from the more expensive share classes into these clean, cheaper share classes. But also, there's been sort of like – as you know probably and our viewers will know, there's been a bit of a fee war, let's call it that way, within passives space in particular. We've seen a lot of compression and competition between ETF and index fund providers. And that's being one of the key drivers as well of the declining fees over the past few years.

Black: So, something that really surprised me in your study was you compared the fees on ESG funds versus non-ESGs or standard funds. And ESG funds came out cheaper. I think that's going to surprise a lot of people. Can you tell us a bit more about that?

Zarate: Yeah, that was a bit of a surprising finding. And I think it's partly due to a bit of selection bias in the sense that we've chosen a reduced number of categories, and within those categories that we selected passive funds for ESG tend to be the predominant force. So, for example, in US large cap, which I alluded to earlier on, the number of – the proportion of assets under management in ESG investments is 73% in favor of passives. So, obviously, we know that passives by default charge lower fees. And so, the more assets into passives, then the obvious conclusion is that the overall average is going to be driven down, but that was a bit of a surprise as well. But I guess it's also indicative that the speed at which the ESG market has developed, it's fairly recent anyway I mean, interest in ESG investments has been growing steadily, but really has been growing very, very fast over the past couple of years and we've seen a lot of the passive funds actually taking market share there.

Black: Jose, thank you so much for your time. For Morningstar, I'm Holly Black.