Stocks reflect declines on monitors as people work on the floor of the New York Stock Exchange … [+]
Not only does past performance of mutual funds not predict future performance, but expense ratios, portfolio turnover and trading costs can have a negative affect on a fund’s performance, according to a study from Personal Fund, a research company focused on mutual funds.
In all fund categories, funds with lower (higher) expense ratios predictably earned higher (lower) returns. In most fund categories, the funds with lower (higher) turnover earned higher (lower) returns. Funds with the highest expenses and turnover were more likely to go out of business sooner than funds with more modest expenses and turnover.
Moreover, past tax efficiency predicted future tax efficiency. The most (least) tax-efficient funds in one period tend to be the most (least) tax efficient in the subsequent period. The study also included a new estimation of uncompensated trading costs, which showed a statistically meaningful negative association between reported turnover (the closest available proxy for trading behavior) and returns for equity funds.
Consistent with the findings of many other researchers, we corroborated that the average pre-tax return of a mutual fund is equal to the return of its asset class less the fund’s expense ratio and its internal trading costs.