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Low-cost funds more likely to outperform higher-cost funds, says Vanguard

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Low-cost funds are more likely to outperform higher-cost funds, according to research from Vanguard Asset Management 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 lower-cost funds outperformed those with higher-costs in nine out of 11 broad investment categories. 
 
For example, in the global equity and bond categories, low-cost funds outperformed by an average of 1.20 per cent and 0.68 per cent respectively. 
 
The research found that low-cost funds outperformed by an average of nearly one per cent over a ten-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 years.
 
In the case of global equities, nearly 70 per cent of active equity managers underperformed their benchmarks while more than 80 per cent 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. In fact, taking survivorship bias into account, 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, says: “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 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.”

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