The top mutual funds in many major categories have fees that hover above their categories averages, Investors Business Daily reports, citing Morningstar data.
While some argue that funds with higher fees are better simply because the managers have to work harder to keep long-term performance numbers up, it is becoming clear that better-performing funds charge more.
U.S. diversified large-cap stock funds have an average expense ratio of 1.69% per year, but funds in the top quartile in that category come in at an average of 1.74%. Mid-caps have an average expense ratio of 1.56%, but top performers in that category charge 1.75% in expenses. By contrast, though, top small-cap funds charge less than the average expense ratios: 1.29% versus 1.46% for the average.
And for these higher fees, investors in top-quartile funds were richly rewarded, Morningstar found. Whereas the average diversified large-cap stock fund returned an average 1.69% in the five years ended through August, the top-performing funds returned 16.04%. The average mid-cap fund in that period returned 1.67%, whereas the top-performing funds turned out an 18.79% return. And the average small-cap fund returned 5.08%, as opposed to 11.08% for the top performers.
Many financial advisers still tell investors to choose funds with the smallest expense ratios, but this advice is shunned by others in the industry.
"For a buy-and-hold investor using actively managed funds, expenses have to come second to performance," said Janet Brown, president of DAL Investment Co. She added, "Over the short term and long term, the correlations negligible. We cant find much of an impact at all.