The Hyperion Effect

Posts Tagged ‘Morningstar’

Whilst it is the purpose of this blog, among other things, to consider the value that active management adds to a portfolio (read Nil) we also regularly discuss the improbable ability of managers to predict the future. To that end I read with interest a piece in the Wall Street Journal a few months back that discussed an interesting tool to perhaps allow us to in fact predict the future. The problem with active manager trying to find a manager that will consistently outperform the market. The second problem is the level of fees that they charge for this outperformance which in many circumstances gives back the additional return generated.

However a recent Morningstar report linked these two items together and showed, as can be seen by the chart below, that managers with lower overall fees tended to perform better than those that charged a higher fee.

The study also found that in addition to having lower fees they turned over much less of the portfolio that those in the bottom quartile which in turn can enhance returns somewhat by limiting tax. Morningstar found that ‘the cheapest quintile of U.S. stock funds were more than twice as likely as the most expensive quintile to survive and beat their categories’ average returns from 2006 to 2010′.

These top (and second) quartile managers are of course mainly index and ETF funds with both low turnover and low fees. So the next time you are trying to work out which fund is going to outperform going forward, look no further than the one with the lowest fees!.