Assessing Fund Costs: Use the Right Measure

You can substantially improve your odds of success with low cost funds, but be sure to look at the right cost measure.

Christopher J. Traulsen, CFA 23 June, 2008 | 4:31AM
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When selecting a fund from within a given peer group, you can give yourself a substantial edge by focussing on costs. While it's true that one can come across the occasional Neil Woodford--that rare manager who succeeds despite lugging around high costs, such managers are few and far between.

Fund Costs Eat Away Returns
So why do costs matter? It's simple--they eat away at your returns year after year, and their impact compounds over time. Take a hypothetical fund that costs nothing, and earns 10% a year over 10 years. If you invest £10,000 initially, you'll have £25,940 at the end of year 10. Compare that to a fund that also returns 10% a year, with a total expense ratio of 1.70% per year. Investing £10,000 in that

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.