Displaying items by tag: indexing

(New York)

If there was ever a mantra for mutual funds, it should be this: boring and cheap is beautiful. A new study by Morningstar has found that when it comes to the funds, investors are best off buying ones with very cheap fees, and not just for the obvious reasons. Morningstar dug deeper to understand the relationship between costs and performance gaps, or the spread between the return of the fund itself versus the fund’s average investor. What it found is that in low price funds, this gap was much smaller. While some of that might be accounted for by simply saying those who buy cheaper funds are smarter investors, the reality is that investors are more patient on returns when they hold cheaper funds. There is less incentive to sell, and therefore they hold the funds longer, leading to better returns.

FINSUM: This makes perfect sense to us. If you have an expensive fund that is losing money, you are going to want to dump it quickly. But if a fund is ultra-cheap, you are more inclined to give it some time.

(New York)

It was long awaited, but still hit the market like a hammer. It was one of those things that you can prepare for over a long period, yet are inevitably shocked when it arrives. In this case, it was the long-awaited release of a zero fee index fund. Fidelity was the first to do it, and while it was anticipated, the move is likely to have far-reaching effects on the industry. For instance, one of the big changes is that large index funds will likely no longer pay licensing fees to the indexes themselves. At the same time though, indexes will proliferate for more narrow and niche areas designed to track all manner of themes. Fees will likely continue to fall, even on the more complex products.

FINSUM: Asset management is seeing a very serious race to the bottom, which is reflected in share prices lately. Two thoughts come to mind. Firstly, those with huge scale will be the big winners as the industry grows more consolidated. Secondly, how long before retirement funds seeing a reckoning and a big move out of expensive products (they are paying an average of 61 bp in fees)?