Fund fees a key factor in investment performance

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Research published today by Morningstar Investment Management South Africa finds that investors in South Africa have better odds of future success when fund selection decisions take cost into account.

The Morningstar study finds that investors in South Africa could make better use of unit trusts if they considered the relative costs of funds within respective categories, with funds with lower total expense ratios having a higher chance of succeeding against their category peers, both in terms of survival and outperformance.

Key findings from the report include:

  • Over a three-year period, the least costly quartile of funds had a higher total return success ratio and higher average annualised total returns across the three ASISA categories analysed;
  • Over three years, the predictive power of fees was strongest for the SA Multi-Asset Low Equity Category, with the priciest quartile of funds showing a total return success ratio of just 9.5 per cent;
  • Over five years, the predictive power of fees was evident, albeit less discernible, and success ratios for the priciest quartiles were relatively elevated, due to – in the opinion of the report’s authors – the impact of market conditions and wide use of performance fees;
  • Over five year periods, the total return success ratios of the SA Multi-Asset High Equity and SA Equity General Equity categories were still the highest for the least costly quartile of funds (65 per cent and 70.4 per cent, respectively).

Kyle Cox, CFA, Investment Analyst, Morningstar Investment Management South Africa comments:

“Until now, there has been very little research in the South African Unit Trust market on the topic of fees and performance. This has raised the question of whether the relationship between fees and performance is consistent within the South African investment management industry, and whether fees can be used as a predictive tool to isolate outperformance for investors in this market. The research findings support the notion that fees do matter.”

For a copy of the complete report, please visit http://corporate1.morningstar.com/ResearchLibrary/ or email mimiceleste.taylor@morningstar.com.

By |Instruments & Investments, May 2017|Comments Off on Fund fees a key factor in investment performance