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High fees destroy performance in bond funds, says Morningstar research


Research from Morningstar has found further evidence of the link between high fund fees and low performance outcomes for investors.

The research, conducted by Morningstar’s director of research for Europe Christopher Traulsen, reviewed average fees and performance for all 442 funds from the Morningstar GBP Bond categories of GBP Diversified Bond, GBP Corporate Bond, GBP Flexible Bond, GBP High Yield Bond, and GBP Inflation-Linked Bond.
For the three and five-year periods ending 31 August 2012, each Morningstar GBP Bond category fund share class was slotted into one of five performance quintiles against its assigned Morningstar category, with average total expense ratios run for each cohort.
The results found that the best-performing quintile of bond funds for the categories under review displayed the lowest average TER of 0.67 per cent; the worst-performing quintile displayed the highest average TER of 1.05 per cent.
Traulsen says: “Time and time again, our research shows that fees are one of the most predictive factors in determining a fund’s likely outperformance. Even in the best of times, the impact of fees on fixed income funds is especially high, given the relative difficulty in beating fixed-interest benchmarks and the relatively compact spread of returns in fixed-interest sectors. In today’s low-yield environment, these factors loom all the larger. The unavoidable implication from our research is that investors would be extremely remiss not to focus on costs as a key criterion when selecting a fixed interest fund.”

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