Morningstar Magazine - August/September 2018 - 41

EXHIBIT 6

Fee Impact Not surprisingly, lower-cost funds tended to have better performance and
higher survivorship rates than their more expensive counterparts.

and outperformed the Agg over the long term,
and that pattern will likely continue. So, indexing
isn't a bad starting point.

Fee Quartile Performance

Yet, there are many active managers who do
outperform, even after controlling for
exposure to common sources of risk. While they
may be taking other types of risks, it is
difficult to replicate their performance with
passive options.

5-Year
Expense Ratio
Quartile

Success Rate

Median Alpha
of Surviving Funds

Survivorship Rate

Success Rate
Conditional on Survival

Median Fee
2008

1

36.92

0.00

89.23

41.38

0.40

2

40.63

-0.01

92.19

44.07

0.57

3

17.19

-0.03

84.38

20.37

0.73

4

23.08

-0.04

81.54

28.30

0.91

Success Rate

Median Alpha
of Surviving Funds

Survivorship Rate

Success Rate
Conditional on Survival

Median Fee
2008

1

48.65

0.03

74.32

65.45

0.40

2

32.00

0.01

57.33

55.81

0.58

3

33.78

0.00

63.51

53.19

0.75

4

28.38

0.00

60.81

46.67

0.99

Success Rate

Median Alpha
of Surviving Funds

Survivorship Rate

Success Rate
Conditional on Survival

Median Fee
2008

1

35.80

0.01

55.56

64.44

0.44

2

18.52

-0.01

45.68

40.54

0.65

3

23.46

-0.02

53.09

44.19

0.84

4

17.28

0.00

39.51

43.75

1.05

10-Year
Expense Ratio
Quartile

Investors who decide to hire an active manager
can improve their odds of success by
screening for those with low fees and strong
performance that doesn't come from loading up on
credit, duration, and other forms of market
risk. Screening for Morningstar medalists with
positive Process and Price pillar ratings is a
good place to start. K
Alex Bryan, CFA, is director of passive strategies for North
America with Morningstar Research Services.

15-Year
Expense Ratio
Quartile

Data as of 04/30/2018.
Source: Morningstar Analyst's Calculations.

of April 2003 into quartiles based on their 2003
annual report expense ratio and tracked their
performance over the next 15 years. I repeated this
exercise (with the 2008 and 2013 expense
ratios) for all funds listed at the end of April 2008
and 2013 and tracked their performance over
the next five and 10 years, respectively. The results
are shown in E X H I B I T 6 .
Not surprisingly, lower-cost funds tended to have
better performance and higher survivorship rates
than their more expensive counterparts.

Active or Passive?

The investment-grade bond market isn't rife with
mispricing. While the Agg is an easier
benchmark to beat than most broad U.S. equity
indexes, many managers who earn higher
returns than that index do so by taking greater
risk-often fishing outside the Agg. That risk
doesn't always pay off, and investors can often
get it more cheaply through low-cost ETFs
that track riskier areas of the investment-grade
universe, like corporate bonds. After controlling for
risk, most active managers have not survived

global.morningstar.com/Morningstarmagazine

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