Investing June 11, 2003

S&P: Lower Expensed Equity Funds Best Pricey Counterparts

June 11, 2003 (PLANSPONSOR.com) - Investors in equity funds with high expense ratios may not be getting their money's worth, according to a new study.
Reported by

According to Standard & Poor’s, funds with lower expense ratios bested their pricier counterparts in eight of nine style categories over both a short- and long-term basis. Only mid-cap blend funds with high expenses outperformed those with lower expense charges.

“Investors don’t always take expenses into account when selecting a mutual fund because they are typically stated in percentage terms – making it harder to translate in a meaningful way,” Phil Edwards, Standard & Poor’s Managing Director of Funds Research, said in a statement. “Investors need to pay closer attention to expenses, especially in a market environment where returns are expected to be in the single digits.   It is in this type of setting that expenses can take a larger proportion of a fund’s return.”

For the study, S&P researchers sorted domestic equity funds in each of the style categories into two groups – those with an expense ratio below the average of their peers and those higher. They then compared the average annualized return for each of the two groups over a one, three, five, and 10-year performance period to determine if a fund’s return justified the level of its expenses over the long term.  

According to the study:

  • Large-cap growth funds above the average  1.6% expense ratio showed a -16.12% return over one year, a -4.74% return over five years and a 7.27% showing over 10 years. Those below the average expense figure turned in returns of -15.66%, -3.71, and 7.59% respectively.
  • Large-cap value funds above the average 1.41% expense ratio turned in performances of -16.46% over one year, -2.61 over five years, and 7.24% over 10 years. Those below the average showed returns of -15.45%, -1.54%, and 8.74% respectively.
  • Mid-cap growth funds above the 1.69% expense average had -19.60% returns over one year, -3.53% over five years, 4.69% over 10 years.  Those below the average showed returns of -18.60%, -1.80%, and 7.69% respectively.
  • Mid-cap blend funds above the 1.26% expense average had -15.44% returns over one year, -2.38% over five years, 10.37% over 10 years.  Those below the average showed returns of -15.75%, -1%, and 9.33% respectively.
  • Small-cap growth funds above 1.78% average expense figure had a one-year performance of -23.54%, -5.32% over five years and 2.44% over 10. Those below the average showed returns of -22.60%, -2.42%, and 7.49% respectively.

«