Low cost: Improving the odds of active management success

Many investors search for the quantitative silver bullet that would enable them to identify talented managers in advance. In this ongoing search for the perfect metric, many overlook a very good measure that can improve the odds of success when selecting actively managed mutual
funds – the expense ratio.

A fund’s current expense ratio – a simple and readily available figure – has historically proved to be an effective predictor of relative future fund performance. Intuitively, this approach seems to make sense because an investor’s return is decreased
by every pound spent on investment-related costs.

Higher costs don’t necessarily mean higher skills

*Past performance is not a reliable indicator of future results.
See note 4 for fund universe and data sources.