MutualFundWire.com: Rekenthaler Maps Discount Wars' Escalation

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Friday, June 13, 2014

Rekenthaler Maps Discount Wars' Escalation

It's only going to get worse.

Morningstar analyst John Rekenthaler writes that that low cost has won the fund wars but that the battles are not over.

Of course, he notes the doubling of BlackRock iShares' lineup Core to 10 ETFs, which required cost cuts on such products as the iShares Russell 3000 Growth and iShares Russell 3000 Value from 25 to nine bps.

BlackRock, Rekenthaler writes, had no choice but cut costs in the face of Vanguard's ongoing onslaught. In fact, he writes that Vanguard's contrarian views on distribution continue to shake things up for everyone else.

But most important is a chart he provide in his column. Developed by his fellow Morningstar analysts, the chart features the 25 largest mutual fund families plotted on an x-axis, which measures performance by Morningstar's risk-adjusted star rating, while y-axis is cost as measured by annual expense. Moreover, the size of each dot is in proportion to the size of the firm.

You need to go to this excellent article to see this chart, but here are some crucial conclusions that he draws from the graphic:

Performance is closely linked with expenses. From the bottom left, representing weaker risk-adjusted returns and higher costs, the dots move consistently up and to the right, toward higher returns and lower costs.

This relationship between performance and expenses likely strikes you as obvious. These days, people take for granted that one more dollar for the fund company is one less dollar for the fund shareholder.