- Share classes that externalize distribution and sub-transfer agency fees enable registered investment advisors to compare investment expense ratios across investment vehicles with more precision.
- A new breed of share class allows fiduciaries, including RIAs, to present investors with a clear delineation of any expenses they are paying.
- Research shows low expense ratios have been associated with stronger investment results over time. Our management fees are among the lowest in the industry.1
Idea in brief: New mutual fund pricing structures – and institutional ones made available to investors – clearly itemize all the fund fees clients are charged to be consistent with fiduciary needs and regulatory oversight. American Funds Class F-3 shares externalize distribution and sub-transfer agency fees. This structure gives fiduciaries a way to meet the goal of transparency while allocating client assets.
Low Expenses Can Be Critical for Positive Investment Outcomes
Academic research shows a correlation between investments’ expense ratios and their net returns over time. Fund track records bear this hypothesis out. Funds with lower relative expenses have been associated with higher total-return success ratios, Morningstar found.2 U.S. equity funds with the lowest quintile of expenses between 2010 and 2015 were successful 62% of the time based on the number that survived and outpaced their category group average.2 The success rate drops to 48% for the funds with the next higher expense ratios and funds with the highest expense ratios were successful just 20% of the time. Morningstar defined success as those that delivered category-beating results on a number of measures during the period and excluded those that were merged away or liquidated.
Lower expenses correlated with higher success ratios of funds in the balanced, taxable bond and municipal bond categories as well, Morningstar found. Funds with low expenses were three times more likely to succeed than those with the highest ones, Morningstar found. Capital Group’s own research using rolling returns corroborates Morningstar’s findings. For example, both U.S. and International large-cap equity funds with the lowest expenses outpaced the indexes at least half the time based on monthly five-year rolling periods, which was significantly higher than the success rates of the universe of all screened equity funds (see chart below). Funds whose managers invest more of their own money in their funds, in addition to having low expenses, have tended to outpace the index even more frequently. U.S. and International funds with both low expenses, in the lowest cost quartile, and high manager ownership, in the highest quartile, outpaced indexes 72% and 84% of the time, respectively (see the disclosure in the chart below for the methodology).