One day in India, I met a fortune teller on the street that was predicting the future by means of a parrot selecting tarot cards from her old wooden table. It did not cost that much so I gave it a go. As it turns out, the parrot's prediction was accurate. I'm glad I did not spend a lot of money gaining insight into my future as my instincts tell me that the quality of the parrots performance probably would not have improved had I spent more money.
As it turns out, it appears the same truth holds for predicting future performance of mutual funds. A study released by Morningstar no less, shows that using low fees as a guide would have given investors better results than even Morningstar's own star-rating system.
How Expense Ratios and Star Ratings Predict Success
This study may further validate our strategies for building investment portfolios which hold some of the lowest cost mutual funds available. For our client portfolios, the average mutual fund expense ratio is approximatley 0.40% with no 12b-1 fees and no loads (commissions).
The Wall Street Journal article citing this study reports: "Morningstar found that in aggregate, low-cost funds had better returns than high-cost funds across all asset classes, during various periods from 2005 through March 2010."
"Low Fees Outshine Fund Star System" WSJ 8/9/2010
The study's author, Russel Kinnel, states “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds....Expense ratios are strong predictors of performance."
For those of you looking for that "Five Star Manager", look no further. If this study is any guide to your investment decisions, Trovena has already found the "Five Star Manager" investments, and they are in our client portfolios.
By the way, the parrot told me I would help people and live a happy life.


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