Any 401(k) professional with a pulse knows about the ongoing fight over low fees; tort lawyers like Jerry Schlichter helpfully educate the few that don’t.
And now it’s not only an ERISA fiduciary issue, but also one of performance, according to Derek Horstmeyer, assistant professor of finance at George Mason University’s Business School.
Horstmeyer took a look at actively managed mutual funds with relatively high expense ratios—yearly fees as a percentage of assets under management—which he said are associated with some of the worst performing and most poorly managed funds, especially in the U.S.-stock category.
“I looked at all actively managed mutual funds that trade in the U.S., comparing the average return of high-fee funds (those with an expense ratio over 1.5 percent) with the average return of low-fee funds (all funds with expense ratios under this level),” Horstmeyer explained in The Wall Street Journal over the weekend. “It painted a pretty negative picture of the high-fee options.”
Consider the performance difference between high-fee and low-fee active funds focused on large-cap U.S. stocks, He noted.
“Over the past 10 years through the third quarter of 2018, the average high-fee option delivered an average annual return of 10.61 percent after expenses, while the low-fee option averaged 12.26 percent—a difference of 1.65 percentage points and a substantial advantage for the low-fee option.”
Could it simply be a few poorly performing funds negatively impacting the average overall? Could they be souring an otherwise decently-performing cohort?
No, Horstmeyer finds.
“Over the 10 years through the third quarter of 2018, the median high-fee option delivered an annual return of 10.80 percent, while the median low-fee option delivered 12.36 percent. The difference in medians is 1.56 percentage points, similar to the difference in average returns noted above. This and all other similar results with medians suggest that it isn’t a few extreme bad outliers driving the results.”
And it gets worse when the focus is on even higher-cost mutual funds.
“Again, take the example of large-cap U.S. stocks. When we look at funds that charge more than 2 percent annually in fees, we see the average 10-year return fall another 0.60 percentage point, down to 10.01 percent.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
