Low fees a strong indicator of fund survivorship: Morningstar

The latest research by Morningstar found lower fees played a major factor in a fund's chance of survival and outperformance compared to more expensive peers.

"Across nearly all major categories examined in this study, the lowest fee quintile achieved both higher success ratios and stronger average total returns than the highest fee quintile, underscoring the pervasive influence of fees across asset classes," Morningstar said.

This pattern was highly evident in Australian large-cap equities, where success ratio declined steadily as fees increased.

In global large-cap equities as well, low-cost index funds and a small number of inexpensive systematic active strategies emerged as clear beneficiaries.

"The results reflect the increasingly concentrated market environment shaped by a technology-led rally," Morningstar said.

The funds with the cheapest fees recorded a success ratio of 67%, compared with just 29% for the most expensive funds for the global equities category.

Morningstar observed a contrasting pattern for fixed-income strategies, which benefited from more active management.

"The outperformance of active strategies in this category was largely attributable to an ability to trim duration in a rising-yield environment or to go overweight credit exposure as spreads narrowed-or both," it said.

"Passive strategies, unable to take such active tilts, contributed to a relatively low success ratio of 33% for the cheapest quintile."

However, Morningstar said while active managers frequently outperform fixed-income indexes on a gross-of-fees basis, these gains do not always translate into superior net outcomes once fees are accounted for.

"Broadly, these findings align with our view that active fixed-income managers can deliver stronger outcomes over a full economic cycle, primarily through a persistent overweight to corporate credit relative to benchmark indexes," Morningstar said.

The divergence between low- and high-cost funds was most pronounced in the multisector growth category.

"This result is consistent with the well-documented difficulties active managers face in adding value through dynamic asset allocation, given the inherent challenges of reliably forecasting market regimes," it said.