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A Land Where High Fees Reign Supreme

Alternatives have defied the trend of making low costs king.

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Morningstar and other researchers have consistently found that expense ratios are one of the few data points predictive of future mutual fund performance, and investors have increasingly gotten that message, with greater asset flows going to the cheapest funds (as you can see here). Yet, when it comes to investing in alternative mutual funds, it seems that investors forgot to read the memo. 

Over the past three years, alternatives were the lone broad Morningstar Category where investors seemed to favor higher-cost funds over lower-cost funds. From 2011 to 2013, only 36% of the net $58 billion that has flowed into alternative mutual funds has gone to funds in the cheapest quintile. Across all mutual fund categories, 121% of the net $432 billion of inflows has gone to funds in the cheapest quintile over the same time period. The figure is greater than 100% because as money was coming into cheap funds, it was leaving more-expensive funds. 

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Jason Kephart does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.