Chart of the Week: The resounding impact of fees on your fund’s success
An updated look at the enduring predictive power of fees.
This week’s insights come from Senior Manager Research Analyst, Zunjar Sanzgiri and his latest analysis on the enduring predictive power of fund fees in Australia.
Why now?
Morningstar research and academic studies have repeatedly demonstrated that fees are a reliable predictor of the future success of a fund. One of the enhancements we are making to the Morningstar Medalist Rating methodology in April 2026 is to make it clearer how we evaluate expenses.
We are introducing a Medalist Rating Price Score to illustrate whether a fund’s fee is a competitive advantage or a significant headwind. The MPS will boost low-cost funds’ ratings while discounting those for expensive funds.
Qualitative factors such as the investment team, investment process, and parent organisation are also vital when determining a fund’s outperformance potential. Still, lower-cost funds generally have a greater chance of surviving and outperforming their more expensive peers. With the rollout of the simplified Medalist Rating, we provide updated evidence to show the enduring predictive power of fees.
The results
Across nearly all major categories examined in this study, the lowest fee quintile achieved both higher success ratios and stronger average total returns than the highest fee quintile, underscoring the pervasive influence of fees across asset classes.
This pattern can be clearly seen within Australian large-cap equities, where success ratios decline steadily as fees increase, indicating a simple yet consistent inverse relationship between costs and investor outcomes.
Findings
The divergence between low- and high-cost funds was most pronounced in the multisector growth category. Here, the cheapest fee quintile achieved a success ratio of 87%, compared with just 14% for the most expensive quintile. This result is consistent with the well-documented difficulties active managers face in adding value through dynamic asset allocation, given the inherent challenges of reliably forecasting market regimes.
A contrasting pattern emerged within the fixed-income asset class. Market conditions were particularly challenging over the period, with many strategies struggling to preserve capital, let alone generate meaningful returns. It’s clear that active management has its benefits here; the three middle Expense Ratio quintiles—mainly active strategies with competitive pricing—performed favourably versus the cheapest quintile, where passive strategies typically reside.
Concluding thoughts
The relationship between fees and future performance is more consistently observable in some asset classes than in others. Nevertheless, fees are certain, persistent, and deducted directly from returns, imposing a commensurately higher performance hurdle that managers must overcome. The findings reinforce the importance of fee discipline for investors, ensuring that fees are supported by a durable and repeatable source of value.
