Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I think too much attention is paid to a fund's expenses. A quote from the article: "Among similar investments, few metrics are as predictive of long-term performance as the fees you pay. The higher the fees, the lower, on average, returns will be." This may be true for index funds, but I don't find it true for most managed funds. In comparing two funds, or a group of funds in a similar category/objective, I don't care what the fund's expenses are, I look at the bottom line returns that I get. Are you going to go with a fund with just because it has a low expense ratio, over one with a high ratio with much better long term returns? I don't care how much money the manager makes as long as I get the highest returns from that fund. I have many funds with higher expense ratios than other funds in a category with much better historical returns than ones with lower expenses. The emphasis should be on fund performance, ie, what you make, bottom line.
@heathkit makes some valid points. I would also add that the type and investing style of the fund needs to be taken into account. International type funds will have higher fees for example.
Congratulations on your superior performance. You have made some wise and highly profitable mutual fund investment decisions. Indeed, the very bottom-line is how much you get to keep over the long haul. The lowest cost fund provider need not always produce the largest reward.
I suspect scores of MFO members can boast of similar success. I can too, although only marginally. The relative winning was never an upward straight-line set of happenings for me. Staying the coarse is an important factor.
Your outcomes and my outcomes are anecdotal experimental evidence that supports the proposition that some higher expense ratio funds do outperform less expensive rivals. Stock picking skills and better exit/entry timing can overcome the cost handicap. But be very careful when extrapolating your anecdotal experiences to an overarching market generalization. Broad statistics paint a different, more gloomy picture.
In fact, research clearly demonstrates that higher costs matter in reducing the likelihood of actively managed funds achieving positive Alpha (excess returns) over extended timeframes. Outliers do exist; some fund managers are exceptionally talented folks. But the integrated overall statistics say that these superior investors are rare birds.
How rare are these guys? Vanguard and Morningstar have done studies to put a number on these instances. Here are Links to the Vanguard and the Morningstar works:
Vanguard presents a nice set of summary charts that clearly show that the median return for the lowest cost quartile consistently outdistances the returns from the median return of the highest cost option. These are overall statistics so outliers on the positive side of the distributions are always present. The trick is to identify these star performers early in their history. Yes that is possible.
Further in the Vanguard paper, a figure shows the percentage of actively managed funds that outdistance their Index rivals over a 10 year period. The data is presented for 5 fund categories. For surviving funds, the Developed and Emerging market International funds had the highest outperformance likelihoods at 48% and 40%, respectively. Small Cap Blend fielded the lowest percentage of outperformance at the 26% level. Winners are out there; it’s our task to find them. Performance persistence beyond the study timeframe is yet another issue.
Morningstar’s Russell Kinnel asked and answered as follows: “How often did it pay to heed expense ratios? Every time.”
He concluded with some wise advice: “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.”
Costs always matter, but are definitely not the singular criterion in making a final fund selection. The odds are better for the lower cost options. Don't allow anecdotal evidence to overwhelm base rate statistics.
@MJG Wow, ditto Mona! I think that is one of the better comments you've written in a long time, perfectly measured. I don't know what you were having yesterday, but I wouldn't mind having some of it today (as long as..... it isn't too expensive ).
“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.”
Unbelievable Stuff (I don't use Crap) Your a loser on this "advice", You If don't know the Primary focus in fund selection...you have a lot of work to do, Kinnel included
I think you may need to read the article instead of looking at isolated sentences, even if they come from the conclusion section.
To offer a little context, consider this excerpt from the same article (emphasis added)
Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.
That's taking the "Primary focus" of the fund into account.
@msf: Please try to keep your requests reasonable, and allow for the varying capabilities of the individual. Next you'll be demanding that all MFO posters pass some common core standard.
Thank you for reading, reflecting, and responding to my submittal.
Although I've been investing since the mid-1950s, I still am in the learning mode. Presently, I use a multi-criteria list to sort candidate fund options. Based on a tidal wave of industry and academic studies, cost considerations are always one item on that list. Many believe it belongs at the top of that list.
You suggested that a "Primary focus" is mandatory. It must be extremely significant in your selection process since you capitalized "Primary".
Please tell us if you can what is Primary in your approach.
I'm forever receptive to learning how I can improve my investment procedures. Please expand your comment; in its present form, it does not really inform.
I'm sure, all MFO members will appreciate and possibly deploy your Primary insight.
If we equate investing levels with schooling, the article appears to be directed at about grade level 3. Most here have long been aware that we pay fund fees and that in most cases they are hidden from view but are reflected in a fund's total return. No surprise to most here. However, among the general public, unfortunately, I've found ignorance and confusion about these fees. So it's a pretty good article, assuming it's directed more at those less sophisticated investors.
The writer is on target when he compares our reaction to these hidden fees compared to how we react to more obvious ones. If I get hit with a $20 transaction fee or account maintenance fee I'm on the phone next day to ask why. But I pay hundreds or thousands of dollars a year in the hidden ones without a whimper. I think that's human nature.
TB is correct in that one of the nicer things about the M* analyzer is its ability to calculate your average ER on all your holdings. I'm typically in the .70% area, which M* thinks is pretty good.
It's an argument probably as old as fund investing. Some say fees don't matter much. Others attach great importance. I suspect that if you trade often (and successfully) they don't matter much to you. If you turn a quick 15-20% profit on an investment you only held for 3-6 months and than move on to another "conquest", what's an extra 2 or 3% in fees? But, if you're the buy and hold type, they matter more. I'd expect that the longer you hold a given investment, the more compelling the case would be for keeping fees low.
MJG, always available to help investors in "learning mode.
Short take don't have time for Full course. Your Primary Focus for investing in Mutual Funds IS The FUND MANAGER, Imagine you are running a Business (if you can) do you hire the best employees you can find?...Answer please__________ Good: Now say you want to buy a mutual Fund, Do you want the BEST Manager(s) you can Find?....Answer Please________ Ones that will Make you the returns you need to be Successful....? OK: your on the right path.....now get to work finding those managers Who will do the best work for you and make you the excellent return you require Fund Expenses will be at the bottom of your concerns... Always Pay for performance... Further Advice available upon request...tb
Comments
Congratulations on your superior performance. You have made some wise and highly profitable mutual fund investment decisions. Indeed, the very bottom-line is how much you get to keep over the long haul. The lowest cost fund provider need not always produce the largest reward.
I suspect scores of MFO members can boast of similar success. I can too, although only marginally. The relative winning was never an upward straight-line set of happenings for me. Staying the coarse is an important factor.
Your outcomes and my outcomes are anecdotal experimental evidence that supports the proposition that some higher expense ratio funds do outperform less expensive rivals. Stock picking skills and better exit/entry timing can overcome the cost handicap. But be very careful when extrapolating your anecdotal experiences to an overarching market generalization. Broad statistics paint a different, more gloomy picture.
In fact, research clearly demonstrates that higher costs matter in reducing the likelihood of actively managed funds achieving positive Alpha (excess returns) over extended timeframes. Outliers do exist; some fund managers are exceptionally talented folks. But the integrated overall statistics say that these superior investors are rare birds.
How rare are these guys? Vanguard and Morningstar have done studies to put a number on these instances. Here are Links to the Vanguard and the Morningstar works:
https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost
http://news.morningstar.com/articlenet/article.aspx?id=347327
Vanguard presents a nice set of summary charts that clearly show that the median return for the lowest cost quartile consistently outdistances the returns from the median return of the highest cost option. These are overall statistics so outliers on the positive side of the distributions are always present. The trick is to identify these star performers early in their history. Yes that is possible.
Further in the Vanguard paper, a figure shows the percentage of actively managed funds that outdistance their Index rivals over a 10 year period. The data is presented for 5 fund categories. For surviving funds, the Developed and Emerging market International funds had the highest outperformance likelihoods at 48% and 40%, respectively. Small Cap Blend fielded the lowest percentage of outperformance at the 26% level. Winners are out there; it’s our task to find them. Performance persistence beyond the study timeframe is yet another issue.
Morningstar’s Russell Kinnel asked and answered as follows: “How often did it pay to heed expense ratios? Every time.”
He concluded with some wise advice: “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.”
Costs always matter, but are definitely not the singular criterion in making a final fund selection. The odds are better for the lower cost options. Don't allow anecdotal evidence to overwhelm base rate statistics.
Nice talking with you.
Best Wishes.
I love your plain and eloquent writing style.
Yes, the facts speak volumes.
Mona
Unbelievable Stuff (I don't use Crap) Your a loser on this "advice", You If don't know the Primary focus in fund selection...you have a lot of work to do, Kinnel included
To offer a little context, consider this excerpt from the same article (emphasis added)That's taking the "Primary focus" of the fund into account.
@msf: Please try to keep your requests reasonable, and allow for the varying capabilities of the individual. Next you'll be demanding that all MFO posters pass some common core standard.
Respectfully, OJ
Thank you for reading, reflecting, and responding to my submittal.
Although I've been investing since the mid-1950s, I still am in the learning mode. Presently, I use a multi-criteria list to sort candidate fund options. Based on a tidal wave of industry and academic studies, cost considerations are always one item on that list. Many believe it belongs at the top of that list.
You suggested that a "Primary focus" is mandatory. It must be extremely significant in your selection process since you capitalized "Primary".
Please tell us if you can what is Primary in your approach.
I'm forever receptive to learning how I can improve my investment procedures. Please expand your comment; in its present form, it does not really inform.
I'm sure, all MFO members will appreciate and possibly deploy your Primary insight.
Best Wishes.
Several of the above comments are damn pointed without.
Who, me??
The writer is on target when he compares our reaction to these hidden fees compared to how we react to more obvious ones. If I get hit with a $20 transaction fee or account maintenance fee I'm on the phone next day to ask why. But I pay hundreds or thousands of dollars a year in the hidden ones without a whimper. I think that's human nature.
TB is correct in that one of the nicer things about the M* analyzer is its ability to calculate your average ER on all your holdings. I'm typically in the .70% area, which M* thinks is pretty good.
It's an argument probably as old as fund investing. Some say fees don't matter much. Others attach great importance. I suspect that if you trade often (and successfully) they don't matter much to you. If you turn a quick 15-20% profit on an investment you only held for 3-6 months and than move on to another "conquest", what's an extra 2 or 3% in fees? But, if you're the buy and hold type, they matter more. I'd expect that the longer you hold a given investment, the more compelling the case would be for keeping fees low.
Short take don't have time for Full course. Your Primary Focus for investing in Mutual Funds IS The FUND MANAGER,
Imagine you are running a Business (if you can) do you hire the best employees you can find?...Answer please__________
Good: Now say you want to buy a mutual Fund, Do you want the BEST Manager(s) you can Find?....Answer Please________
Ones that will Make you the returns you need to be Successful....?
OK: your on the right path.....now get to work finding those managers Who will do the best work for you and make you the excellent return you require
Fund Expenses will be at the bottom of your concerns... Always Pay for performance...
Further Advice available upon request...tb