FYI: Birinyi Associates did something amazing. They took all funds with at least a billion dollars in assets under management and a five-year track record and plotted them on a graph showing the association between 2015 performance and expenses.
What did they find? “Expense-wise there was no difference between winners and losers. Period,” writes Jeffrey Yale Rubin. In fact, the funds that charged the most actually outperformed.
Regards,
Ted
http://blogs.barrons.com/focusonfunds/2017/03/08/its-not-the-fees/tab/print/
Comments
The article is short and doesn't describe how the study was done. (The non-print version doesn't contain any links to more detail or the study cited.) For all we know (and from the brief description given), the study didn't control for obvious factors like number of funds in a category, or performance by category.
For example, the top performing category in 2015 appears to be Japan funds. Those funds aren't cheap. A fund's category is likely to have a much more significant impact on performance than expenses, especially over a short period of time. (On the other hand, lots of category winners appear to be muni funds, which should have lower costs than other categories - that shows the problem in taking superficial looks at data.)
Similarly, the size of a category will tend to skew results. Those muni funds? I haven't checked, but I'm pretty sure there are a lot less of them than vanilla large cap funds, which are typically more expensive. So even if muni funds did better, there may not be enough of them to significantly affect a linear regression (2015 performance vs. ER).
GIGO on so many levels, at least until some more details are provided.
(My guesstimate about Japan funds being top performers came from doing a M* search on funds between 48% and 52% category ranking in 2015 - to approximate the category average - then sorting by 2015 absolute performance. Top "average" fund was CNJFX, a dismal 1* fund that apparently had a decent 2015. Again illustrating how one year is meaningless.)
By sliding the expected return control closer to the left (simulating a low return environment where CAPE is historically high) fees grab proportionally more of the return that the investor keeps.
I will also note that fees always have a negative impact on investor returns. What the chart fails to shown is a negative returns scenario and the additive effect ERs have on negative returns. Investors deal with negative risk while also absorbing the negative impact of fees during down markets. Mutual fund managers never have a losing year when their funds have negative years, the investor does. ER is paid regardless as to whether the investor subtract the fee from gains or adds the fee to losses.
https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost
A study based on 1 year of performance results that was completed with a poorly documented procedure is a recipe for a faulty study. Here is a Link to a Morningstar study that has a lot more meat to it.
https://corporate1.morningstar.com/DownloadRPSpdf.aspx?url=http://rps.morningstar.com/api/v2/654566632/documents/752589/file
Not a shock that costs matter (perhaps matter most) across all asset categories.
Best Wishes
Since the article is old, and some of those links are dead, I'll help out a little. The Elon Musk backed funds referenced are also described in this Bloomberg article.
You can't expect to buy a Long/short or alternative fund for 0.25%.
Returns are always quoted after expenses. E.R. is a hurdle to higher performance. To the extent that hurdle is overcome, it is not news E.R. doesn't matter.