6th May 2016
The most expensive funds are much less likely to outperform research from Morningstar in the US fund market shows.
The research firm says it demonstrates that expense ratios are proven predictors of future fund performance. Funds with lower expenses have higher “success ratios,” which indicate the percentage of funds that survived and outperformed their category group, while higher-cost funds have lower success ratios.
The research was written by Russel Kinnel, chair of Morningstar’s North America ratings committee and examined U.S. open-end (like UK unit trusts) and exchange-traded funds to evaluate the predictive nature of fund expenses on future total returns, load-adjusted returns, standard deviation, investor returns, and the Morningstar Rating.
He says: “While we think it makes sense to consider a variety of factors when choosing funds, our research continues to find that fund fees are a strong and dependable predictor of future success. We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds. Strikingly, our finding held across virtually every asset class and time period we examined, which clearly indicates that investors should keep cost in mind no matter what type of fund they are considering.”
Highlights of the study include: