Why No One Sees High-Cost Flops
High-cost funds are an even worse bet than you think.
This article first appeared in the April 2007 issue of Morningstar FundInvestor.
To borrow from Woody Hayes, when you buy a high-cost fund, three things can happen and two of those are bad. First, you can get good performance. Second, you can get underperformance. Third, the fund can perform poorly and then get merged away.
Yet, some people insist that costs aren't important--because they remember only the first outcome. And, to be sure, there will always be some funds that manage to overcome high costs and outperform their peer group. There's Federated Kaufmann (KAUFX), for example, which has produced outstanding 15-year returns even though it charges 1.95%. The much more common examples are funds like Westcott Nothing but Net and Phoenix Nifty Fifty, both of which came out with high costs, produced poor performance, and then were put out of their misery.
Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.