The Cheapest Funds Are the Best Funds - Vivek Kaul's Diary
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The Cheapest Funds Are the Best Funds

May 9, 2016


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".

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.

Please note: This article was first published in Moneyweek on May 06, 2016.

Merryn Somerset Webb is the editor-in-chief of Moneyweek, the best-selling financial magazine in the UK, and is a director of two investment trusts - the Baillie Gifford Shin Nippon Trust and the Montanaro European Smaller Companies Trust. Before joining Moneyweek, she worked at the Japanese public broadcaster NHK, SBC, UBS, BNP Paribas, and The Week. Merryn has a weekly column in the FT and a monthly column in Saga. She is a regular TV/radio commentator and speaker on financial matters.

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