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Vanguard research shows that fund costs dictate returns


Latest research from Vanguard Asset Management shows that costs matter with low cost funds tending to outperform high cost investments. Their findings show that most actively managed funds tend to underperform their chosen benchmarks over five, ten and 15 years, largely, they claim, as a result of high fees.

 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 quartiles, the low-cost funds outperformed those with higher-costs in ten out of the 11 investment categories over the ten year period ending 31 December 2014.
For example, in the global equity and bond categories, low-cost funds outperformed by an average of 1.2 per cent and 0.5 per cent per annum respectively.  In aggregate, low-cost funds outperformed high-cost funds by an average of 1 per cent per annum over the ten-year period.
Dr Peter Westaway, Head of Vanguard’s Investment Strategy Group in Europe, commented:  “Our analysis reaffirms previous academic studies by Vanguard and others that low-cost funds have tended to perform better than high-cost funds over time. Consequently, it’s important that investors pay attention to costs because in the world of investing, you don’t always get what you pay for.”
The analysis also aligns with Vanguard’s The case for index fund investing for UK investors research, which finds that high costs are one of several reasons why the majority of actively managed funds underperformed their chosen benchmarks over five, ten and 15 years.
For example, in the case of global equities, 64 per cent of active equity managers underperformed their benchmarks over the 15 year period through 2014, while more than 87 per cent of global bond managers underperformed their benchmarks over the same period. When the research took survivorship bias into account, the percentage that underperformed increased further to 82 per cent for global equities and 91 per cent for global bonds.
Regarding The case for index fund investing for UK investors report, Peter Westaway, said:  “Active funds have a poor record of outperforming their benchmarks over the long term, and one of the main reasons is that they typically have higher costs than index funds. Indeed, low cost is the only quantifiable factor that we’ve found to be historically associated with higher average returns over time. Vanguard has built its reputation on the principle that costs matter and while the picture is less favourable for active managers we believe there is a role for both low-cost active and indexing in a portfolio.  In our view, successful active management is driven by the combination of low cost, top talent, and patience so we would encourage investors to consider these important factors when investing in active funds.”

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