For Passive Funds, a Stronger Link Between Fees and Performance
When it comes to fund performance, you don't always get what you pay for.
When shopping for products of unknown quality, price forms a cue that shoppers can use to differentiate products. It is often a safe assumption that a higher-priced product offers better performance than a lower-priced product. For instance, the Porsche 911 lists for $93,000 while the Chevy Malibu will set you back $20,000. But this is not always the case, particularly with fund investing. Unlike the Porsche, there is no cachet from buying a high-priced fund. Still, price can be useful when predicting results--though not in the way fund companies would like.
Morningstar's Analyst Rating for funds is based on five pillars: People, Parent, Process, Performance, and Price. The first three of these pillars are somewhat qualitative, while Performance and Price are much more quantitative. Price is the most tangible, both in terms of the impact of price on fund performance and comparability across funds. On average, we find that the higher the price of a fund, the worse its performance tends to be, and the link between fees and performance is stronger for passive funds.
Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.