News & Commentary

The growing majority of cost-conscious investors 31 May 10


Australian investors are likely to place an increasingly high priority on keeping funds management costs to a minimum.

This is largely reflecting the widening recognition that high fees can significantly reduce an investor’s long-term returns.

Among other factors is that when long-term returns are more subdued and short-term markets are more volatile, investors tend to focus more on fees when selecting managed funds.

Fascinatingly, a study published this month by Vanguard in the US – Costs Matter: Are Investors Voting With Their Feet? – measures the popularity of lower-cost funds among American investors.    

Vanguard examined Morningstar fund research data showing the net inflow into equity and bond funds over the 10 years to December 2009. The study included, of course, a close examination of the inflows into low-cost Exchange Traded Funds (ETFs) and conventional index funds as well as into actively managed funds.

In short, the study found that funds with lower-expense ratios received the “lion’s share of investor dollars over the period”, write its authors Francis Kinniry, Donald Bennyhoff and Yan Zilbering.

“… many investors are likely recognising that lower costs help them to keep more of a fund’s returns – [and] have been ‘voting with their feet’ and gravitating to low-cost investment options,” the authors conclude.

The study’s key findings include:

  • Equity funds in the lowest expense quartile had a net asset inflow of almost $US395 billion over the decade – representing 86% o the net asset inflows to equity funds in the quartiles with net positive inflows.
  • Equity funds in the top two quartiles in terms of expenses suffered net cash outflows of $81 billion.
  • ETFs and conventional index funds captured 80% o the net inflow to equity funds tagged the “lowest of the low” in fee terms.

This Vanguard study carries other crucial revelations regarding low-cost funds which Smart Investing will discuss in coming weeks.

 

 

* Written by Robin Bowerman, Head of Retail at Vanguard Investments Australia.
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