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:

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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.

Results:

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: http://www.askdrmoney.com/Ins_ILP_SP.htm
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