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By Cara Waters | Published Mar 29, 2011

Study confirms high cost funds deliver poor returns

New research by TCF Investment has confirmed that funds in the lowest cost quartile consistently provide the best returns to investors across each of the main Investment Management Association (IMA) managed sectors.

The study, which ranked funds in the three main IMA managed sectors by TER, showed that the lowest cost funds returned 3.9 per cent for active, 4.1 per cent for passive and 3.5 per cent for cautious.

In comparison funds in the highest cost quartile returned 3.1 per cent for active, 2.8 per cent for passive and 2.9 per cent for cautious.

TCF Investments looked at the average returns over the last three years from the most expensive quarter to the next most expensive quarter.

"In many ways the results are not a surprise", said David Norman, joint chief executive and founder of TCF Investment.

"Perhaps the greater surprise is that too few investors focus on costs, which are a clear guide to the future, and will instead focus on past performance which is not a guide."

Mr Norman also noted "in all three sectors, without exception, a fund with a TER below one per cent was in the top quartile of returns."

The research follows the recent launch by both Schroders and JP Morgan Asset Management of low-cost, actively managed funds.

Robin Stoakley, managing director at Schroders, claimed Mr Norman's comments were "highly selective".

He said: "A number of low cost funds have performed well but a lot just follow the index.

"A discriminating investor can find high quality fund managers who can achieve value against their chosen benchmarks

"I agree there are a lot of rubbish expensive funds around but there are also a lot of quality funds that have the potential to add significant value."

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