Frugal 5-Star Funds
Cheap price tags go hand-in-hand with many high-performing offerings.
Funds with higher fees operate at a structural disadvantage. After all, they have a higher hurdle to clear before they can outperform their peers. It's not too surprising then to see many cheap funds with 5-star Morningstar Ratings (a 5-star rating means a fund has soundly outperformed its peers on a risk-adjusted basis). As my colleague Russel Kinnel wrote in his article "Why No One Sees High-Cost Flops", some funds with expensive price tags will still manage to outperform their peers over the long haul. But when looking at survivorship rates among low- and high-cost funds, Kinnel's findings demonstrated the predictive power of expense ratios: Funds in the cheapest quintile were more than twice as likely to succeed compared with those in the most expensive bracket.
Using the Premium Fund Screener, you can do a couple of simple tests to find out how many 5-star funds have low price tags. We started off our screen by searching for funds that sport below-average expense ratios. Keeping with our finding that low expenses work well alongside a high Morningstar Rating, we then screened for consistent performers--those funds that have earned 5-star Morningstar Ratings for the three-, five-, and 10-year trailing periods. In doing so, we also made sure that the current managers are responsible for the funds' strong 10-year records. To help keep the list manageable, we selected the "Distinct Portfolio Only" option to limit the results to one share class per fund. Also, we recommend that you limit your search to funds covered by Morningstar analysts because we follow the industry's best and biggest funds.
As of July 1, 2008, the screen returned 30 results from stock and fixed-income fund categories. To see the list of these reasonably priced 5-star funds, click here.
The funds that made the list include a fairly even mix of fixed-income and domestic-stock funds, as well as a smattering of international and specialty funds. Their expense ratios range from a mere 0.15% annually for Vanguard High-Yield Tax-Exempt (VWAHX), up to 1.36% annually for Wells Fargo Advantage Small Cap Value (SSMVX). As we'd expect, the fixed-income funds are congregated on the lower end of that range, while the small-cap and growth offerings sit on the high end.
Some fund families, such as American, Fidelity, and Vanguard, often offer low-cost funds from the get-go. Others, such as Harbor Capital Advisors, have lowered their fees over the years as assets have grown, thereby passing along economies of scale to shareholders. Take a look at Harbor International (HAINX), for example. This fund is a Fund Analyst Pick in the foreign-large-value category. Over the past 10 years, its annual expense ratio has dropped from 0.94% to 0.81%, making it one of the cheapest funds in its category. So, in addition to the great stock-picking of manager Hakan Castegren, investors have pocketed that much more over the years by paying roughly 0.20% less per year than the typical no-load peer's fee.
Morningstar.com Premium Members can run this screen themselves by clicking here. Not a Premium Member? You can still run this screen by taking a free, 14-day Premium Membership trial. (Note that the results may change as funds come in or drop out of the screen over time.)
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.