Friday, August 11, 2006

Views about expense ratio and return on funds

In his comment to my posting, a James Ong said that some funds with higher expense ratio have consistently produced better returns that NTUC Income's funds.

I asked Dr Money for his views. Here is his reply:

* As for the idea that funds with higher expense ratios have higher returns, there is no evidence of this in the literature (ie past research).

* To the contrary, index funds have lower expense ratios and on average they out-perform managed funds. The difference in performance turns out to be approximately equal to the difference in their expense ratios.

* In the long-run, costs matter in determining a fund's performance -(and the lower the costs, the better the performance

James Ong also says, "I would encourage the public to visit the LIA/IMAS website to avoid any confusion."

Dr Money said:

There is no confusion. That web site is also the source of the data I used in my study.

I went through each of the 600+ funds at the LIA/IMAS web site and pulled out all the equity funds.

For ILPs, I took the average expense ratio for each insurer's equity funds. For unit trusts, I took one average for all equity unit trust funds.


1) For NTUC Income, the average expense ratio for its equity funds is 1.0 per cent.

2) For the other 10 life insurance companies, the average expense ratio for their equity funds is 1.7 per cent. (It ranges from 1.4 to 2.2 per cent.)

3) For unit trusts, the average expense ratio for all equity funds averages 2.1 per cent.

The results are shown in:


James Ong said...

Dear Sir,

Thank you for this discussion and I thank Dr Money for his invaluable insight to this subject.

May I also clarify that I did not suggest the idea that higher expense ratio=higher return.

From the LIA/IMAS website and Dr Money's website, we can also find some funds with higher expense ratios performing better.

Hence, I commented on your post "NTUC Income ILP Funds perform better than other funds"

I believe such healthy discussions will only bring good to all consumers and correct me if am wrong.

Truth Seeker said...

Just by looking at expense ratio is misleading. Expense ratio is relevant to be looked at but it is only 1 measurement of a fund performance. Just basing on expense ratio alone is erronous otherwise the purchase decision will be simply by buying the fund with the lowest expense ratio which is definitely not the ideal way. What is more important is how much the fund returns are. If expense ratios are higher and investors are able to get a better actual return comparatively to a fund with low expense ratio but yet low returns only, what should the choice be? Of course past returns are not indicative of future performance.

Quoting from a Mercer report (which can be found on Mercerfundwatch's website as a research article on Expense Ratio)

"while expense ratios are important,the key consideration for any investor should be on the actual return achieved net of expenses. The analysis we have undertaken of the relationship between expense ratios and excess returns shows no clearly defined relationship, at least for expense ratios below 3% per annum."

To provide another unbiased view, allow me to quote from another source.

Extracted from another article on Fundsupermart,

"Please note that having a very low expense ratio does not guarantee good performance. There are some funds with very low expense ratios (anything with an expense ratio of 1.6% or lower is considered low for an equity fund). However, these funds are hardly the best performing funds in their peer group. There are some funds which have slightly higher expense ratios, but these funds do so well that their performance after expenses are far better than their peers."


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