A recent report by Morningstar, a global investment research firm providing data, research, and ratings on a wide range of investment offerings, has highlighted a significant trend in the Australian investment landscape. The study indicates that lower-cost funds possess a greater probability of survival and outperformance compared to their more expensive counterparts. High fees, according to the analysis, present a substantial headwind for Australian investors. Morningstar’s study tracked Australian retail funds from 2021 through last year, including those liquidated or merged, basing success on outliving and outperforming rivals.
Morningstar associate analyst Zunjar Sanzgiri noted, “Higher-cost funds are much more likely to be liquidated or merged, as historical data has shown.” This trend was particularly evident in Australian large-cap and global shares, where low-fee strategies, such as exchange-traded funds, consistently demonstrated superior performance. Two-thirds of the cheapest funds beat rivals, compared to fewer than one in three of the most expensive. This pressure is influencing industry changes, exemplified by Magellan Financial’s restructuring, moving its $5.3 billion global equities funds to Vinva Investment Management, a Sydney firm utilising computer models, accompanied by deep fee reductions.
While the general rule favoured lower fees, the bond market presented a notable exception. During a challenging period marked by aggressive interest rate hikes from the Reserve Bank of Australia in 2022, active managers with mid-range fees outperformed the cheapest passive funds. These strategies navigated volatility by avoiding falling bond prices and investing in riskier corporate debt. Conversely, passive funds, constrained by their index-following mandate, struggled. Vince Scully, founder of financial adviser Life Sherpa, explained that rigid index tracking is often ill-suited for the bond market. He asserted active management adds significant value by adjusting for interest rate shifts, recommending investors only pay for it where it offers clear benefit.
