Study by Morningstar's Russel Kinnel Shows Fund Fees are Proven Predictors of Future Success

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Morningstar, Inc.

May 05, 2016, 10:13 ET

CHICAGO, May 5, 2016 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, has published a study again finding that expense ratios are proven predictors of future fund performance. Funds with lower expenses have higher "success ratios," which indicate the percentage of funds that survived and outperformed their category group, while higher-cost funds have lower success ratios.

Authored by Russel Kinnel, chair of Morningstar's North America ratings committee and editor of Morningstar® FundInvestorSM, the study evaluated the predictive nature of fund expenses on future total returns, load-adjusted returns, standard deviation, investor returns, and the Morningstar Rating™.

"While we think it makes sense to consider a variety of factors when choosing funds, our research continues to find that fund fees are a strong and dependable predictor of future success," Kinnel said. "We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds. Strikingly, our finding held across virtually every asset class and time period we examined, which clearly indicates that investors should keep cost in mind no matter what type of fund they are considering."

Highlights of the study include:

  • The lowest-cost U.S. equity funds succeeded three times as often as the highest-cost funds. The least-expensive quintile had a total return success rate of 62 percent, compared with 48 percent for the second-cheapest quintile, 39 percent for the middle quintile, 30 percent for the second-priciest quintile, and 20 percent for the most-expensive quintile.
  • International-equity funds had a 51 percent success ratio for the least-expensive quintile compared with 21 percent for the most-expensive quintile.
  • Balanced funds had a 54 percent success rate for the least-expensive quintile compared with 24 percent for the most-expensive quintile.
  • Among taxable-bond funds, the least-expensive quintile delivered a 59 percent success rate versus 17 percent for the most-expensive quintile. Municipal bond funds showed a similar pattern, with a 56 percent success rate for the least-expensive quintile and 16 percent for the most-expensive quintile.

To read the full study, which evaluated U.S. open-end and exchange-traded funds, click here. A summary is available in the April 2016 issue of Morningstar FundInvestor and in an article and video on Morningstar.com®.

Morningstar has approximately 115 manager research analysts worldwide who cover approximately 4,000 funds. The company provides data on approximately 202,000 open-end mutual funds, 10,000 closed-end funds, and 13,500 exchange-traded product listings as of March 31, 2016.

About Morningstar, Inc. 
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 525,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on nearly 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement and management as of March 31, 2016. The company has operations in 27 countries.

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SOURCE Morningstar, Inc.

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