Are low costs and investment outperformance incompatible?

Are low costs and investment outperformance incompatible?

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1. There are downsides to low-cost products

Don't know what you actually own, causing you to get all worried when the index falls.

Lower levels of service.

Outperformance versus a given benchmark is by definition impossible. However this does not mean you can't choose low cost products following benchmarks which perform well.

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2. Costs only matter when the product underperforms!

Picture this: a "high cost" fund manager matches their fund benchmark after charging an average of 2% pa in fees over the last 5 years.

Should you be unhappy?

On one hand, you shouldm't really care. After all, you are left with the same result as if you had invested in a low-cost index fund that tracks the same benchmark used by your "high cost" fund manager.

The end result is identical.

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On the other hand, you may be questioning whether this is the right manager for you for the future.

Are you confident enough in the manager's future ability to deliver you outperformance over its relevant benchmark that can recoup the total fees it will charge?

Because fees only really come into the equation when your fund manager performs badly.

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Conclusion

So are low costs and investment outperformance incompatible? Of course not.

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If you can find fund managers willing to charge zero (or otherwise, a very low fee) for underperforming its benchmark, in return for charging a much higher fee for outperforming, then you will enjoy:\

• low costs if the fund matches or fails to beat its benchmark; or
• performance that beats the benchmark and hence improves your overall portfolio returns, thus rendering the issue of "costs" irrelevant.

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The material above provides general information only and does not take into account your personal objectives, financial situation or needs. Hence the views expressed may not be appropriate for your circumstances!