How to Screen For the Funds
Look for funds that meet key criteria when building portfolios.
- Two traits in combination can be helpful in identifying funds with a track record of outpacing indexes over long periods — low expense ratios and high manager ownership.1
- Funds with lower expense ratios have tended to outpace the index more frequently than their peers.
- Investment firms whose managers invest more of their own money in their funds have tended to outpace the index more frequently than their peers.
- Funds with low expenses and high manager ownership can help investors over time.
- We examined the funds in Morningstar’s U.S. and foreign large-cap categories over a 20-year period and ranked them into quartiles based on their level of expense ratios or firm-level manager ownership.
- We found that the group of funds belonging to both quartiles — those that had the highest manager ownership and lowest expense ratios — meaningfully improved average outcomes for investors over the periods we analyzed.
Look for Funds That Meet Two Key Criteria Large-Cap Equity Funds With Low Expense Ratios and High Manager Ownership
- Two traits we studied — low expense ratios and high manager ownership — significantly improved success rates versus the index, and were associated with greater average risk-adjusted returns.
- The portfolio of large-cap funds with those two traits outpaced indexes more frequently than other funds in the periods we analyzed. The portfolio also generated meaningfully greater alpha (a measure of risk-adjusted results).
- Together, these screens significantly boosted success rates over the periods we studied. Because large-cap equity occupies such a large part of most portfolios, higher success rates can result in substantial gains.
Two Steps Raised the Success Rate
Success Rates in Large-Cap Equities (Net of Fees)
- Another important trait is low downside capture, which refers to a fund’s ability to outpace indexes during market declines.
- Funds that provide resilience during downturns and less volatility can be especially important in retirement, when investors are taking withdrawals.
- Low expense ratios and high management ownership have been historically associated with a strong track record against indexes. We found that adding a third trait, downside capture, to the investment selection process enhanced results during withdrawal scenarios.
- How much do these traits help during retirement? We examined the four Morningstar® category groupings shown in the chart to find out how often the group of funds identified by our screens in each category, on average, beat indexes in a withdrawal scenario over rolling 10-year periods.
- We screened for downside capture, expense ratios and manager ownership. The group of funds that met the downside capture and expense ratio screens experienced higher success rates, as did the group of funds meeting both the downside capture and manager ownership screens.
- Finally, the group of funds that met all three screens — downside capture, expense ratios and ownership — experienced even higher success rates.
The Group of Select Equity Funds, on Average, Outpaced Indexes More Often in a Withdrawal Scenario