I am often accused by the financial industry of being obsessed by the fees they charge. What do the fees matter, they say, if the performance is good? Instead of looking for the cheapest funds I should just be looking for the best. My answer has always been the same the majority of the time, the cheapest funds are the best.
You could argue that that's because caring about cost is an indicator of caring about customers and generally being a good manager. But it is also because regular outperformance is very hard to come by in stockmarkets and there are almost no fund managers capable of doing well enough to compensate their investors for the effects of high fees. I am pleased, then, to see a new study put out from Morningstar's Russell Kinnel that makes this all 100% clear.
According to his work, expense ratios (the number that includes all the costs rather than just the management fee) are "proven predictors of future fund performance". The cheapest funds were found to be "at least two to three times more likely to succeed than the priciest funds". That was the case "across virtually every asset class and time period," something, says Kinnel that "clearly indicates that investors should keep cost in mind no matter what type of fund they are considering".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
You can read the study here,but I think we can call that the end of this argument. You want to do well as a fund investor? Make the costs the very first thing you check before you buy.
-
Investing in a dangerous world: key takeaways from the MoneyWeek SummitIf you couldn’t get a ticket to MoneyWeek’s summit, here’s an overview of what you missed
-
Autumn in Crete, the Greek island of cultureMoneyWeek Travel Katie Monk reviews the InterContinental Crete, Grecotel LUXME White Palace and the adults-only Asterion Suites & Spa
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
Value is starting to emerge in the marketsOpinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
