436 / 708
2
ingly appealing pricey funds delivered a good result
to shareholders.
Moving out from U.S. equities, performance became
less of a contrary indicator, but it was still better to
bet on low fees than big returns.
For international equity, the cheapest-quartile funds
with the worst past returns also had the best returns
going forward. In this case, they earned an annualized
4
.
26%
versus
3
.
22%
for the priciest funds with the
best past returns. Once again, the cheap laggards had
the best results of any of the
16
groups, though the
priciest funds with great past returns at least managed
to finish third from the bottom.
Among taxable-bond funds, the story was a little
different. Yes, the cheap laggards went on to
beat the pricey return champions, but the returns
part of the screen didn’t seem to matter. Cheap
funds did well across the board, and pricey did poorly.
The best-performing group was the cheapest funds
with top-quartile performance, and the worst was the
priciest funds with bottom-quartile performance.
So, we didn’t see a snapback reversion to the mean
so much as the steady hand of low costs.
For muni-bond funds, cheap funds ruled the day once
more, though again it didn’t help much to sort
by returns. What was really dramatic, though, were
the success ratios. The priciest muni funds had
success ratios of a mere
2%
for pricey funds with
poor past performance and
0%
for pricey funds
with good performance.
Let’s step back to look at the success ratios across the
board because they have an interesting story to tell.
While the top future returns generally came from low-
cost laggards, the top success ratios generally came
from low-cost funds that outperformed over the prior
five years. The main reason would be that a fund
with low costs and strong past performance is highly
unlikely to be killed off and also quite likely to be
a big fund, as fees are inversely related to asset size.
And naturally, big funds are good bets to survive.
The Battle of Costs vs. Performance
Continued From Cover
U.S. Equity
Expense
Quartile
Avg Exp
Ratio (%)
5-Yr Return
Quartile
Avg 5-Yr
Return (%)
Funds With
5-Yr Return
Avg Subsequent
10-Yr Rating
Avg Subsequent
10-Yr Return (%)
10-Yr Success
Ratio
1
0.73
4
-1.92
149
3.51
7.41
37.58
3
1.68
302
3.23
6.93
42.38
2
2.99
366
3.47
7.19
51.91
1
7.56
303
3.21
6.77
51.16
2
1.16
4
-2.04
208
3.19
7.10
23.56
3
1.24
231
2.90
6.75
26.84
2
3.45
287
2.87
6.61
31.36
1
7.18
314
2.72
6.31
31.53
3
1.56
4
-2.15
250
2.81
6.44
18.80
3
0.89
222
2.73
6.13
17.57
2
2.87
190
2.91
6.63
25.26
1
7.69
196
2.37
5.78
21.43
4
2.17
4
-2.70
382
2.67
5.88
9.42
3
0.69
223
2.68
5.80
10.31
2
3.14
186
2.68
6.21
18.82
1
6.95
160
2.10
5.46
9.38
International Equity
Expense
Quartile
Avg Exp
Ratio (%)
5-Yr Return
Quartile
Avg 5-Yr
Return (%)
Funds With
5-Yr Return
Avg Subsequent
10-Yr Rating
Avg Subsequent
10-Yr Return (%)
10-Yr Success
Ratio
1
0.90
4
1.55
26
2.93
4.26
19.23
3
4.32
49
3.32
4.24
51.02
2
7.59
102
3.00
4.05
43.14
1
12.80
101
3.04
3.80
53.47
2
1.38
4
2.29
65
2.93
3.70
24.62
3
5.52
78
2.69
3.58
29.49
2
8.15
69
2.88
3.66
30.43
1
13.13
73
3.02
3.80
43.84
3
1.80
4
2.28
73
2.68
4.13
19.18
3
4.89
76
2.48
3.43
19.74
2
7.74
63
2.65
3.47
19.05
1
12.48
67
3.00
3.82
44.78
4
2.43
4
0.89
145
2.42
2.89
10.34
3
5.39
91
2.50
3.19
9.89
2
8.51
47
3.23
4.00
42.55
1
11.67
42
2.46
3.22
23.81
Taxable Bond
Expense
Quartile
Avg Exp
Ratio (%)
5-Yr Return
Quartile
Avg 5-Yr
Return (%)
Funds With
5-Yr Return
Avg Subsequent
10-Yr Rating
Avg Subsequent
10-Yr Return (%)
10-Yr Success
Ratio
1
0.53
4
4.69
55
3.05
4.15
40.00
3
5.61
79
3.36
4.44
41.77
2
5.49
159
3.24
4.02
41.51
1
7.03
200
3.60
4.69
63.50
2
0.84
4
4.30
73
2.55
3.88
17.81
3
5.07
140
2.83
4.07
30.71
2
5.99
136
2.94
4.34
45.59
1
7.07
142
3.16
4.58
54.93
U.S. Open-End Mutual Funds
Excludes load waived, fund of funds, and alternatives/commodities. Ranked by expense quartile (1 cheapest, 4 most expensive),
then by five-year return quartile (4 worst, 1 best) with subsequent 10-year return and star rating. Expense/five-year return data
through 12/31/2005. 10-year return/rating data through 12/31/2015.