Actually, fund fees do matter

Active fund managers would have you believe fees don't matter, says Merryn Somerset Webb. But they are the first thing you should check.


What do fees matter? Quite a lot

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".

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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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.