The pervasive influence of fund fees

Mike Taylor

Managing Editor and Publisher

18 May 2026

Research and ratings house, Morningstar, has produced new analysis which appears to prove a higher likelihood of high-fee funds disappointing investors, and sometimes by a significant margin.

Morningstar arrived at this conclusion after examining a pool of funds across core asset classes and then investigating the relationship between the average total returns and average fees across fee quintiles for the five years ended December, last year.

The research said that, across nearly all the major categories examined in its study, the lowest fee quintile achieved both higher success ratios and stronger average total returns than the highest fee quintiles “underscoring the pervasive influence of fees across asset classes”.

“This pattern can be clearly seen within Australian large-cap equities, where success ratios decline steadily as fees increase, indicating a simple yet consistent inverse relationship between costs and investor outcomes.

“In global large-cap equities, the results reflect the increasingly concentrated market environment shaped by a technology-led rally. Over the five-year period ended December 2025, this market environment posed significant challenges for active managers, particularly those employing high-conviction, fundamentally driven strategies. Despite elevated volatility during 2025, low-cost index funds and a small number of inexpensive systematic active strategies emerged as clear beneficiaries within the global large-cap grouping,” the analysis said.

“The cheapest fee quintile recorded a success ratio of 67%, compared with just 29% for the most expensive quintile, while the intermediate quintiles produced similarly weak results,” Morningstar said.

The analysis said a contrasting pattern emerged within the fixed-income asset class. Market conditions were particularly challenging over the period, with many strategies struggling to preserve capital, let alone generate meaningful returns.

“It’s clear that active management has its benefits here; the three middle Expense Ratio quintiles—mainly active strategies with competitive pricing—performed favourably versus the cheapest quintile, where passive strategies typically reside. The outperformance of active strategies in this category was largely attributable to an ability to trim duration in a rising-yield environment or to go overweight credit exposure as spreads narrowed—or both,” it said.

“Passive strategies, unable to take such active tilts, contributed to a relatively low success ratio of 33% for the cheapest quintile. That said, it’s also evident that higher-fee fixed-income strategies do not necessarily beget superior performance; outcomes for the most expensive quintile – dominated by high-cost active strategies – were the worst, with a success ratio of just 4%.

Morningstar said the Broadly, findings align with its view that active fixed-income managers can deliver stronger outcomes over a full economic cycle, primarily through a persistent overweight to corporate credit relative to benchmark indexes. That said, while active managers frequently outperform fixed-income indexes on a gross-of-fees basis, these gains do not always translate into superior net outcomes once fees are accounted for.

It said the divergence between low- and high-cost funds was most pronounced in the multi-sector growth category.

“Here, the cheapest fee quintile achieved a success ratio of 87%, compared with just 14% for the most expensive quintile. This result is consistent with the well-documented difficulties active managers face in adding value through dynamic asset allocation, given the inherent challenges of reliably forecasting market regimes. It was unsurprising that the most successful, lowest-cost quintile was dominated by multi-sector strategies employing significant passive components.

“By contrast, the weak outcomes observed among the most expensive funds were further exacerbated by the prevalence of secondary fund distributions encumbered by inefficient legacy fee structures.”