(PUB) Investing 2016

2

The Battle of Costs vs. Performance Continued From Cover

U.S. Open-End Mutual Funds

ingly appealing pricey funds delivered a good result to shareholders.

U.S. Equity

Expense Quartile

Avg Exp Ratio (%)

5-Yr Return Quartile

Avg 5-Yr Return (%)

Funds With 5-Yr Return

Avg Subsequent 10-Yr Rating

Avg Subsequent 10-Yr Return (%)

10-Yr Success Ratio

Moving out from U.S. equities, performance became less of a contrary indicator, but it was still better to bet on low fees than big returns. For international equity, the cheapest-quartile funds with the worst past returns also had the best returns going forward. In this case, they earned an annualized 4 . 26% versus 3 . 22% for the priciest funds with the best past returns. Once again, the cheap laggards had the best results of any of the 16 groups, though the priciest funds with great past returns at least managed to finish third from the bottom. Among taxable-bond funds, the story was a little different. Yes, the cheap laggards went on to beat the pricey return champions, but the returns part of the screen didn’t seem to matter. Cheap funds did well across the board, and pricey did poorly. The best-performing group was the cheapest funds with top-quartile performance, and the worst was the priciest funds with bottom-quartile performance. So, we didn’t see a snapback reversion to the mean so much as the steady hand of low costs. For muni-bond funds, cheap funds ruled the day once more, though again it didn’t help much to sort by returns. What was really dramatic, though, were the success ratios. The priciest muni funds had success ratios of a mere 2% for pricey funds with poor past performance and 0% for pricey funds with good performance. Let’s step back to look at the success ratios across the board because they have an interesting story to tell. While the top future returns generally came from low- cost laggards, the top success ratios generally came from low-cost funds that outperformed over the prior five years. The main reason would be that a fund with low costs and strong past performance is highly unlikely to be killed off and also quite likely to be a big fund, as fees are inversely related to asset size. And naturally, big funds are good bets to survive.

3.51 3.23 3.47 3.21 3.19 2.90 2.87 2.72 2.81 2.73 2.91 2.37 2.67 2.68 2.68 2.10 2.93 3.32 3.00 3.04 2.93 2.69 2.88 3.02 2.68 2.48 2.65 3.00 2.42 2.50 3.23 2.46

7.41 6.93 7.19 6.77 7.10 6.75 6.61 6.31 6.44 6.13 6.63 5.78 5.88 5.80 6.21 5.46 4.26 4.24 4.05 3.80 3.70 3.58 3.66 3.80 4.13 3.43 3.47 3.82 2.89 3.19 4.00 3.22

1

0.73

4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1

-1.92 1.68 2.99 7.56 -2.04 1.24 3.45 7.18 -2.15 0.89 2.87 7.69 -2.70 0.69 3.14 6.95 1.55 4.32 7.59 2.29 5.52 8.15 2.28 4.89 7.74 0.89 5.39 8.51 12.80 13.13 12.48 11.67

149 302 366 303 208 231 287 314 250 222 190 196 382 223 186 160

37.58 42.38 51.91 51.16 23.56 26.84 31.36 31.53 18.80 17.57 25.26 21.43

2

1.16

3

1.56

4

2.17

9.42

10.31 18.82

9.38

International Equity

Expense Quartile

Avg Exp Ratio (%)

5-Yr Return Quartile

Avg 5-Yr Return (%)

Funds With 5-Yr Return

Avg Subsequent 10-Yr Rating

Avg Subsequent 10-Yr Return (%)

10-Yr Success Ratio

1

0.90

26 49

19.23 51.02 43.14 53.47 24.62 29.49 30.43 43.84 19.18 19.74 19.05 44.78 10.34

102 101

2

1.38

65 78 69 73 73 76 63 67 91 47 42

3

1.80

4

2.43

145

9.89

42.55 23.81

Taxable Bond

Expense Quartile

Avg Exp Ratio (%)

5-Yr Return Quartile

Avg 5-Yr Return (%)

Funds With 5-Yr Return

Avg Subsequent 10-Yr Rating

Avg Subsequent 10-Yr Return (%)

10-Yr Success Ratio

1

0.53

4 3 2 1 4 3 2 1

4.69 5.61 5.49 7.03 4.30 5.07 5.99 7.07

55 79

3.05 3.36 3.24 3.60 2.55 2.83 2.94 3.16

4.15 4.44 4.02 4.69 3.88 4.07 4.34 4.58

40.00 41.77 41.51 63.50 17.81 30.71 45.59 54.93

159 200

2

0.84

73

140 136 142

Excludes load waived, fund of funds, and alternatives/commodities. Ranked by expense quartile (1 cheapest, 4 most expensive), then by five-year return quartile (4 worst, 1 best) with subsequent 10-year return and star rating. Expense/five-year return data through 12/31/2005. 10-year return/rating data through 12/31/2015.