Low-cost funds outperform high-cost rivals every time – research shows

Russell Kinnell of Morningstar.com has published research which shows that controlling costs is the key to investment success.

Yesterday Money to the Masses published an article titled ‘’Should you invest actively or passively?’’, which concluded that most investors should base themselves around passive indexed solutions rather than expensive active managed funds.

While active management costs are a centre point in the ‘active vs passive’ debate, Kinnell has shown that fund expenses are also a strong predictor of future performance.

While you can read Kinnell’s findings in full here, we’ve summarised the key points below:

• In every single time period and data point tested, low-cost funds beat high-cost funds.
• Expense ratios (the publicised measure of fund costs as a % of the fund’s assets under management) are strong predictors of performance. Even better than Morningstar star ratings.
• Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance. Start by focusing on funds in the cheapest or two cheapest quintiles, and you'll be on the path to success.
• Stars ratings can be helpful, too, particularly in identifying funds that might be merged out of existence. Even if a 1-star fund starts to perform better, there's always the danger that the fund company will decide that its track record is too poor and will fold the fund, forcing you to move your money elsewhere.