Everyone has the same advice to give when talking about index investing. Basically, there are two key pieces of advice to adhere to when you are investing in index funds or practically any investment. They are;
- Past returns are not indicative of future returns
- Higher fees are not indicative of higher returns.
So I decided to have a play with some of the data from InvestNow and compare fees vs returns for several share funds.
Listen, I am not a financial analyst or anything like that. And by no means is this advice for anyone. I have just tabulated the average return after tax for several funds for different time periods and plotted them against the fee the fund charge. Take out of it what you will.
In the blue corner
The funds that I looked at are all equity funds. A fancy word for shares in companies. Many are Australasian Equities, and a few from the US, so I can’t rule out any regional biases. The funds and fees charged are;
| Index Fund | Fees | Fund Type |
|---|---|---|
| Nikko AM Concentrated Equity Fund | 1.84% | Australasian Equities |
| Nikko AM Core Equity Fund | 0.98% | Australasian Equities |
| Fisher Funds New Zealand Growth Fund | 2.35% | Australasian Equities |
| OneAnswer Single Asset Class NZ Share Fund | 1.84% | Australasian Equities |
| Vanguard International Shares Select Exclusions Index Fund | 0.20% | International Equities |
| Smartshares - NZ Mid Cap Fund (NS) (MDZ) | 0.60% | Australasian Equities |
| Smartshares - Total World Fund (NS) (TWF) | 0.56% | International Equities |
| Smartshares - Europe Fund (NS) (EUF) | 0.55% | International Equities |
| Smartshares - NZ Top 50 Fund (NS) (FNZ) | 0.50% | Australasian Equities |
| AMP Capital NZ Shares Index Fund | 0.39% | Australasian Equities |
| Smartshares - US 500 Fund (NS) (USF) | 0.35% | International Equities |
And I turned them overtime periods of 3 months, 6 months, 1, 2, 3, 5, and 10 years. I did not care which fund was which, I was only interested in returns vs. fees.
Short term
Below are the trends for 3 and 6 months.
Over this short period, there is a much wider spread of returns and little correlation. But the trend is weakly positive in that higher returns are weakly correlated to higher fees
Midterm
Below are the trends for 1 and 2 years
In this mid-term, the weakly positive trend starts to get even weaker- almost flat at the 2-year stage. This indicates that there is no relationship between returns and fees.
It is also interesting that the low fee funds are all grouped tightly together. Although this is probably due to several of the funds being largely composed of the same equities. (NZ top 50 and AMP NZ shares indexes are basically the same, similar to Smartshares US500 and Vanguard being tightly correlated to each other.)
Long term
Here is when it falls down. Many of the index funds don’t have 5 and 10-year data. Most are new funds. But from the funds that are left, the trend turns weakly negative. That is to say that higher fees weakly correlate with lower returns.
Summary
What I have shown here is not real evidence. Nor can I prove anything. It was just an easy exercise to see if there any pattern amongst 11 index funds. And to be honest, there really wasn’t much of a trend at all when it comes to the long-term.
One problem with looking over the last 10 years is that New Zealand has been in a bull market for most of those years. It will be interesting to see what happens if the markets slow down and how the relationship between fees and returns continues.
What I will say is that if you do choose a lower fee fund, anecdotally you will have a better chance of beating higher fee fund. Let’s say that all fund tend to regress to the mean. That is the mean of the stock market. Then you can expect the difference in returns to be the difference in fees paid.