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".