High Fees Destroy Bond Fund Performance

Investors should focus on costs as a key criterion when selecting a fixed-interest fund

Christopher J. Traulsen, CFA 3 October, 2012 | 12:19PM
Facebook Twitter LinkedIn

Any investor with experience will know about fund fees and their pernicious effect on returns. But given current low yields in the bond market, it’s especially important that fixed-income investors keep the impact of fees front of mind.

Even in the best of times, the impact of fees on fixed income funds is especially high given the relative difficulty in beating fixed-interest benchmarks and the relatively compact spread of returns in fixed-interest sectors. These factors loom all the larger when yields are compressed.

Bond Fund Review: Methodology

To get a sense of the fee impact on fixed-interest funds in the UK in recent years, I recently reviewed the Morningstar GBP Bond categories. The following categories were included in my research: GBP Diversified Bond, GBP Corporate Bond, GBP Flexible Bond, GBP High Yield Bond, and GBP Inflation-Linked Bond. I left in all classes of each fund. Returns were grossed-up to pre-tax levels to allow for accurate comparison between gross/net classes of onshore and offshore funds. Classes were slotted into performance quintiles versus each fund’s assigned Morningstar category over three and five-year periods (all ending at 31 August 2012), with average total expense ratios (TERs) run for each cohort.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

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