Sometimes I keep beating the same drum. Do fees matter when it comes to your investments? I’ve previously talked about how funds with higher fees eat into your returns over time- but today- let’s look at whether or not higher fee funds produce better returns.
Higher fee Higher Return
It’s easy to think if your new to investing that higher fees will give you higher returns. I thought exactly that when I first started inverting- along with looking closely at past performance as an indicator of future performance.
That is why when I first started investing in RaboDirect a decade ago I bought into some high fee funds- including; Nikko AM Concentrate Equity fund at 1.84% at the time, OneAnswer New Zealand Share Fund 1.84% at the time, and Fisher Funds New Zealand Growth fund at 2.35% at the time. Some of the fees have changed since then- but they are still high.
On the face of it- if you look at the 10yr return after fees of these three funds they are quite good.
- Nikko AM Concentrate Equity fund 10-year average – 12.57%
- Fisher Fund New Zealand Growth fund 10-year average – 16.04%
- OneAnswer New Zealand Share Fund 10-year average –14.44%
But then you look at some lower-priced funds like the Smartshares NZ top 50 fund, with a fee of 0.5%, or the Smartshares NZ Mid Cap fund, with a 0.6% fee, the higher fund fees don’t look that outstanding. Remember all the above high priced funds are all Australasian equity funds.
- Smartshares NZ top 50 fund 10-year average – 14.72%
- Smartshares NZ Mid Cap fund 10-year average- 16.58%
So nearly a quarter of the fee (0.5% compared to 2%) for a comparable return.
The shorter-term returns are a bit choppy too. Fisher and OneAnswer are lower than the NZ index funds, but Nikko is very much underperforming as of October 2019.
|Nikko AM Concentrate Equity Fund||2.16%||1.00%|
|Fisher Fund New Zealand Growth fund||3.02%||12.76%|
|OneAnswer New Zealand Share Fund Fund||1.08%||14.46%|
|Smartshares NZ top 50||0.50%||17.76%|
|Smartshares NZ Mid Cap||0.60%||17.19%|
When I started with investing I was picking funds based on past performance only. Which is how I ended up with multiple Australasian equity funds with high fees. Diversification wasn’t on my mind- only returns.
Not really a good idea- but that was the idea behind starting investing with small amounts. I decided it was better to just start now than to wait until I thought I knew enough. I basically paid for an investing education with higher fees.
Fees Vs Returns on InvestNow
InvestNow offers over 100 funds, and Matt has created a cool website that tabulates the past performance for all the funds on InvestNow. It shows all the retund after fees but before tax. Sure you can get this data on InvestNow aswell- but its faster on this site. It is getting a bit out of date- was last updated in April 2019.
I’ve always read about fees having no influence on returns- and over time I’ve learnt to believe it. But sometimes it’s nice to look at the data to truly convince yourself. So- I’ve plotted all the funds on InvestNow below. The following graphs show returns against fees for all the funds separated into 6 categories of funds.
- International Equities
- Australasian Equities
- Listed Property
- International Fixed interested, cash and cash equivalent
- New Zealand Fixed Interest
- Diversified Funds
Along with each funds performance, I have added a trend line. If the trendline’s slope is positive- the line is pointing upwards to the right- then higher fees are correlated with higher returns- If it is sloped down to the right- then higher fees are correlated with lower returns.
One Year Returns Vs Fees
The majority of trends are negative for the 1-year returns, with the exception of the diversified funds. The positive trend of the diversified funds is only due to the Fisher Funds Property & Infrastructure Fund having an exceptional year with returns of 23.06%- with a fee of 2.72%.
Two Year Returns Vs Fees
The majority of trends are again negative or flat for the 2-year returns. Two sectors of funds had positive trends- the diversified fund, and the Australasian Equities. The Australasian funds have a large spread thought. And the positive trend of the diversified funds is again only due to the Fisher Funds Property & Infrastructure Fund having with a two-year return of 14.94%- with a fee of 2.72%.
Three Year Returns Vs Fees
The 3-year average returns are a mixed bag. Half are slightly positive and half are negative. Again it’s the same two sectors of funds that had positive trends- the diversified fund, and the Australasian Equities. The Australasian funds again have a large spread. And the positive trend of the diversified funds is again skewed by the Fisher Funds Property & Infrastructure Fund having with a three-year return of 14.23%- with a fee of 2.72%.
Five Year Returns Vs Fees
Five-year returns vs fees are largely flat- meaning that there is no difference in performance with increasing fees. International Equities is quite negative and Diversified funds are again positive. With the same fund, the Fisher Funds Property & Infrastructure Fund, helping out to make the slope positive with a five-year return of 13.5%- with a fee of 2.72%. If you’d invested in that fund a few years ago you might not think it was too bad paying the extra in fees. Remember- the returns are after fees but before tax.
Ten Year Returns Vs Fees
The data starts to thin out for 10-year average returns. But overall they are positive with the exception of the international equity funds. The Listed property funds should have a negative trend but the AMP Capital Australasian Property Index Fund is such an outlier that it flips the trend. I have some investments in this fund.
Ten Year Returns Vs Fees for All Funds
If we combine all funds, the trend shows that higher fees are loosely correlated with higher performance. I say loosely because there is a very large spread in fund performance over 10 years. If you look at funds with fees ranging from 1 to 1.5% the average return ranges from 5% to 15%.
Longest Bull Market In History
The graphs were not as clear as I’d hoped in terms of returns vs fees. Many had positive slopes- showing that higher fees on average do produce a higher return for the InvestNow funds. Although the correlations are not very strong- the data points are very spread.
One thing to remember is that the current bull market that started in March 2009 is the longest bull market in history. It’s topped the bull market of the 1990s that lasted 113 months. So of the last 10 years, all markets have gone up. I think the returns vs fee graphs would look remarkably different if they included a period of recession.
There are two data points that I would like to point out- they are in they Australasian Equities data series- they are consistently in the top left corner on all graphs. Seriously- go back and have a look. In each of the graphs (with the exception of the 1-year returns), there are these two green dots in the left top corner. I’ve circled them below.
Those two dots are the two NZ Smartshares funds- the Smartshares NZ Mid Cap and the Smartshares NZ Top 50 fund, which have done remarkably well over the last decade in their fee brackets- eclipsing any other fund with a fee lower than 1%.
Last Man Standing
There are a fee problem with looking into past returns vs fees. The first problem is that not all funds have data that extends to 10 years as they have not been around that long.
The second problem is even if every fund had 10-year data, how many funds have are still standing over 10 years? It is likely that there will be funds that do not last 10 years. I presume that funds with bad performance over time will start to lose investors. And at some stage, they will just have to call it quits and wrap up. This skews the data.
I’m not really sure about the rate at which funds dissolve over time. But think of it this way, you might think that the ancient Romans are very good at building buildings- they are excellent architects- just look at the colosseum and the temple of Ceasar. They all have been standing for thousands of years.
The problem with the assumption that the Romans are great architects is- that we only see the buildings that have lasted for thousands of years. The vast majority- probably 99% of building that the Romans have ever made have been destroyed by either time, war, fires etc.
It could be the same for long term funds- only the best performing actively managed funds will be around in the long term. So looking at long term performance vs fund fees is skewed in favour of funds that have performed well over the long term. That is the last man standing biases.
So with these graphs- I’ll let you decide whether or not higher fees are related to higher returns. I still believe that you shouldn’t solely base your investment decisions on past returns. And I believe that fees, and somewhat the allocation of your investments, are the only thing you can guarantee.
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