Average US investment fees halved over 20 years

New Morningstar research out of the US has reinforced the correlation between low fees and the survival of investment funds in circumstances where average fees have halved over the past 20 years.

The research, the 2023 US Fund Fee Study, released this week, said that fees are a reliable predictor of future returns, with low-cost funds generally having greater odds of surviving and outperforming their more expensive peers.

It said that since 2000, net flows into funds and share classes charging fees that rank within the cheapest 20% of their Morningstar Category group have trended higher and that in 2023 these funds saw net inflows of US$403 billion.

The research said that flows for the remaining 80% of funds had been negative for eight of the past nine years.

“In 2023, these funds lost US$336 billion to collective net outflows – not great, but an improvement from 2022’s negative US$734 tally,” Morningstar said.

It said that active funds had been at the epicentre of outflows.

“While cheap active funds generally attracted inflows over the last 20 years, the tides turned in 2022 and 2023. In the last two years, passive funds attracted over US$1.1 trillion in new money; active funds shed almost US$1.4 trillion,” it said.

“Cheap passive funds remain a crowd favourite, though. The cheapest 20% of passive funds collected 90% of all inflows over the last two years.”

The Morningstar analysis said that cheap funds had been getting significantly cheaper and that over the past 15 years, the cheapest 10% of all funds cut their fees almost in half, while the rest struggled to keep pace.

“The median fund’s fee came down 30% during that time, and the priciest decile declined by just 17%. As the rate of decline slows for the cheapest of the cheap, the gap between the most expensive and least expensive funds could begin to converge,” it said.