John C. Bogle has long noted the failure of the mutual fund industry to lower costs as their asset sizes have mushroomed.
Bogle may say he failed to change the mutual fund industry but his work to teach that costs matter most has educated the consumer. During the past decade ending December 31,1999, investors are educating the mutual fund industry as they vote with their portfolios.
In a recent study performed by Vanguard, investors poured the vast majority of their portfolio into the funds that had the lowest costs. Funds in the lowest quartile of costs in each of five categories, garnered between 55 percent to 93percent of investors' cash.
The 25 percent of equity funds with the lowest costs attracted 86 percent of new money. Even investors choosing active investing were cost-conscious putting 55 percent of their money into funds with the lowest quartile in costs.
Lagging equities a bit, investors put 78 percent of their new fixed income funds into bond funds with the lowest quartile in costs. This number may increase over the next decade as investors learned a painful lesson that the only way to increase returns with high costs was to take on a ton of risk.
Implications for investors
Investors constantly act in irrational ways but this is one concrete example where rationality is gaining strength. We are demanding lower fees. Expensive fund families are losing market share while others are seeking to have the lowest fee index funds on the planet. While some of these low fee products are nothing more than bait and switch tactics, investors are clearing gaining ground and no longer willing to enrich Wall Street to the degree they have in the past.
My advice is to remember that the higher the costs, the lower your returns are likely to be. Don't just settle for the lowest quartile of fund fees, make sure your portfolio has total costs of less than 0.30% annually.
Some day, I hope there is a museum displaying some of the extinct mutual fund families that extracted billions of dollars from investors. For now, I'm just satisfied that investors are understanding lower costs mean higher returns.