Funds with lower fees have more chance of succeeding than more expensive ones, a new report from Morningstar has revealed.
Morningstar’s North America ratings committee chair Russel Kinnel, author of the report, says funds’ expense ratio is the most proven and “dependable” predictor of future returns.
The report, which looked at US equity funds from five years ended December 2015, found that the cheapest US equity funds succeeded three times as often as the highest-cost funds.
In particular, the least-expensive quintile in that category had a total return success rate of 62 per cent, compared with 48 per cent for the second-cheapest quintile, 39 per cent for the middle quintile, 30 per cent for the second-priciest quintile, and 20 per cent for the most-expensive quintile.
Morningstar measured the so-called success ratios of funds along with measures such as future total returns, load-adjusted returns, standard deviation, investor returns, and the Morningstar rating.
The success ratio indicates the percentage of funds that survived and outperformed their category group.
Similar results were found in other asset classes, such as international equity funds, which had a 51 per cent success ratio for the cheapest quintile compared with 21 per cent for the most expensive fund.
Balanced funds had a 54 per cent success rate for the cheapest quintile as opposed to 24 per cent for the priciest.
Kinnel 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.”