Do Your Fund Fees Predict Success or Failure?

The expense ratio is the most proven predictor of future fund returns. Morningstar’s director of manager research, Russel Kinnel, notes that Morningstar’s research, academics, fund companies, and Jack Bogle all point to the same conclusion: fund fees can predict future success and failure. Fund fees should certainly not be used in isolation and other factors should be considered, but the expense ratios should be and can be heavily relied upon.

Morningstar FundInvestor tested the predictive power by taking historical data, including funds that no longer exist, have failed, and/or have been merged away, and applying it to different measures. They tested how expense ratios worked, calculated success ratios, determined which percentage of funds survived and outperformed their category group, and ran the tests against different potential and past economic universes. Morningstar determined the costs are accurate predictors of success and hold up in other test areas. Investors can use the predictive power to better outcomes for investor returns and for load-adjusting returns.