Australian investors are paying a significant performance penalty for expensive managed funds, with new Morningstar research showing higher-fee products consistently lagged cheaper peers across most major asset classes over the five years to December 2025.
The research, released ahead of changes to Morningstar’s Medalist Rating methodology in April 2026, reinforced the growing industry focus on costs as one of the strongest indicators of long-term investment success.
Morningstar said it would introduce a new Medalist Rating Price Score designed to make fee assessments more visible within its ratings framework, boosting lower-cost funds while discounting ratings for expensive products.
“Lower-cost funds generally have a greater chance of surviving and outperforming their more expensive peers,” the research note said.
The study examined Australian-domiciled managed fund share classes across Australian large-cap equities, global large-cap equities, fixed income and multisector growth strategies.
Funds were grouped into fee quintiles and assessed according to both annualised returns and “success ratios”, which measured the proportion of funds that both survived and outperformed category peers over the five-year period.
Morningstar said including failed, liquidated or merged funds was critical because expensive products were historically more likely to disappear, creating survivorship bias in many performance comparisons.
The clearest evidence emerged in Australian large-cap equities, where the cheapest fee quintile produced annualised returns of 9.85 per cent and a 68 per cent success ratio.
By comparison, the most expensive funds returned just 6.82 per cent annually and recorded a success ratio of only 13 per cent.
Global large-cap equity strategies displayed a similarly stark divide between low- and high-cost products.
The cheapest fee quintile delivered annualised returns of 14.58 per cent and a 67 per cent success ratio, while the most expensive funds returned 10.17 per cent with a success ratio of 29 per cent.
Morningstar attributed much of the disparity to the technology-led market rally that dominated global equities over the period, which heavily favoured low-cost index strategies and inexpensive systematic active managers.
“Over the five-year period ended December 2025, this market environment posed significant challenges for active managers, particularly those employing high-conviction, fundamentally driven strategies,” the report said.
The divergence was even more pronounced within multisector growth strategies, where the cheapest funds achieved an 87 per cent success ratio compared with only 14 per cent for the highest-fee cohort.
Annualised returns also declined steadily as costs rose, falling from 8.03 per cent in the cheapest quintile to 5.83 per cent among the most expensive funds.
Morningstar said the results highlighted the persistent difficulty active managers face in successfully timing markets and adding value through tactical asset allocation decisions.
“It was unsurprising that the most successful, lowest-cost quintile was dominated by multisector strategies employing significant passive components,” the report said.
Fixed income produced more nuanced results, with competitively priced active managers outperforming many passive products during a period marked by rising yields and shifting credit spreads. The firm said active managers benefited from the ability to shorten duration exposure or overweight credit as market conditions changed.
However, the report stressed that expensive bond funds still generated the weakest overall investor outcomes. The highest-fee fixed-income quintile recorded a success ratio of just 4 per cent and annualised returns of negative 1.29 per cent over the period.
Morningstar also examined Australian mid- and small-cap equities, where the relationship between fees and performance was less linear due to widespread use of performance fees and the relative inefficiency of the asset class.
Despite this, lower-cost strategies still outperformed higher-fee rivals by almost 200 basis points annually.
“In summary, the relationship between fees and future performance is more consistently observable in some asset classes than in others,” Morningstar said.
“Nevertheless, fees are certain, persistent, and deducted directly from returns, imposing a commensurately higher performance hurdle that managers must overcome.”
The research adds to mounting scrutiny over fees and net returns across Australia’s investment industry as investors increasingly gravitate toward low-cost passive products and regulators intensify pressure on funds to demonstrate value for money.
