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The Clear Link Between Fees and Performance

Timothy Strauts

In today's chart, we are going to look at how mutual fund expenses are linked to performance. This chart shows the top 20 mutual fund firms by assets. The vertical axis shows the percentage of shares classes with a below-average fee level. The horizontal axis shows the percentage of assets with a Morningstar Rating of 4 stars or better. The Morningstar Rating for funds is based on trailing risk-adjusted returns over three-, five-, and 10-year periods. The size of the bubbles indicates the amount of assets under management at each firm.

You'll notice that there is a clear relationship between fees and performance. Firms with high fees have below-average performance and are located in the bottom-left-hand side of the chart. Firms with low fees have a higher likelihood of above-average performance, but it isn't guaranteed. For example, 87% of American Funds' share classes have below-average fees, but only 46% of its assets have a star rating of 4 or 5 stars. 

On the other hand, Dodge & Cox has a perfect 100% score in both metrics, which is a testament to its unique culture and small fund lineup. Vanguard, the largest fund firm, has 100% of its funds with below-average fees. Considering its large lineup of funds, it has an impressive 75% that have a Morningstar Rating of 4 stars or better.

In conclusion, firms with high fees are unlikely to offer above-average performance. Low-fee funds give investors the best chance of success over the long term.