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Lower-cost funds 'more likely' to outperform
28 April 2014
Fees impact actively managed funds, according to new research from Vanguard
Low-cost funds are more likely to outperform their higher-cost
counterparts, according to Vanguard Asset
Management’s latest research on the impact of
costs on investment returns.
Vanguard examined the performance of a range of actively
managed and index mutual funds available to UK investors and
found that when funds are split into lower and higher-cost
segments, the former outperformed the latter in nine out of 11
broad investment categories.
In the global equity and bond categories, low-cost funds
outperformed by an average of 1.2% and 0.68% respectively. The
research found that low-cost funds outperformed by an average
of nearly 1% over a 10-year period.
The latest results support Vanguard’s recently
updated case for indexing research, which finds that high costs
are one of several reasons why most actively managed funds
underperformed their chosen benchmarks over five, 10 and 15
In the case of global equities, nearly 70% of active equity
managers underperformed their benchmarks while more than 80% of
global bond managers underperformed their benchmarks over a
15-year period (1999 to 2013).
When the research took survivorship bias into account, the
percentage that underperformed increased further - no average
active fund has outperformed its benchmark in any market at any
time in the sample.
Peter Westaway, head of Vanguard’s investment
strategy group in Europe said, "Investors can’t
control the markets, but they can control what they pay to
invest. Our research shows that low-cost funds have a greater
chance of delivering investment success".
"These findings support the latest case for indexing study,
which suggests that because of their higher costs, most
actively managed funds failed to outperform their own chosen
benchmark over five, 10 and 15 years."
"As a result, indexed investment strategies can actually give
investors the opportunity to outperform higher-cost active
managers - even though an index fund simply seeks to track a
market benchmark, not to exceed it."