It’s a conclusion that brokers won’t like very much, but investing in high-cost unit trusts doesn’t mean higher investment performance. In fact, it’s the cheapest funds, on average, that outperform the most expensive funds.
This dramatic finding emerges from a research document by Daniel Wessels of DRW Investment Research, which ties in with the findings of the US-based Kinnel Report — this report states that expense ratios in the US are not a good predictor of strong future mutual fund investment returns.
Read more on the Kinnel Report
In other words, investors looking for above-average investment performance do just as well using low-cost products (say, index trackers and ETFs) as high-cost funds (like fund of funds or broker “white label” funds involving multi-managers).
“In every single time period and data point tested, low-cost funds beat high-cost funds,” writes Russel Kinnel, director of mutual fund research at Morningstar Investment Research.
Total expense ratios and performance
Because the total expense ratios of collective investments (unit trusts) were only published in South Africa from April 2007 onwards, we don’t have as much data to go on as Kinnel did in his US study. But Wessels’s study has been able to identify trends emerging from fund performances and their expenses.
Wessels looked at the cost of equity-based South African unit trusts and their investment returns over the period 2007 to 2009.
“The most expensive among the 71 unit trust funds surveyed had average total investment returns significantly lower than the least expensive funds,” explains Mike Brown, managing director of etfSA.co.za. “The lowest cost funds had a significantly higher average return (21,35%) than the average of the overall survey (14,89%).”
Logically we assume that if a fund charges more it must be worth it. What this study shows is that low-cost funds don’t underperform or apply inferior investment strategies while more expensive funds don’t appear to have a performance edge. Can it really be a case of “cheaper is better”? Watch this space.
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