Beyond Returns: Three Powerful Factors in Active Fund Evaluation
Derek Beiter | Senior Investment Analyst
Last Updated: May 13, 2026
A common approach by investors is to invest in funds that have historically outperformed their benchmark index, hoping that a fund’s past outperformance will continue. Our research finds this approach can often work — until it doesn’t. We see a persistence effect in fund performance data, whereby funds with strong three-year performance often have another three-years of good performance in the following period. But when the relationship breaks down, it is often painful. Our resaerch indiciates the prior winners tend to become losers around big inflection points in the market, such as the 2008 Global Financial Crisis and the 2022 sell-off for stocks and bonds induced by rising interest rates.
We believe investors should consider a fund’s past performance as an important criterion. We also believe it is important to review factors outside of performance, not because performance doesn’t matter, but because certain non-performance factors have been shown to correlate with future performance. In other words, investors may benefit from expanding their criteria beyond performance. Here, we highlight three non-performance indicators supported by academic literature: fund expenses, team-based management, and ownership of fund shares by portfolio managers (PMs).
Fund Expenses
- The evidence. There is generally broad agreement among peer-reviewed academic literature that funds with lower fees generally have better performance. A somewhat recent example comes from Michael J. Cooper, Michael Halling, and Wenhao Yang (2021), who found “a strong negative association between net-of-fee fund performance and fees in a sample of all US and international equity funds.”1
- On your own. You can find a fund’s fees and expenses in its prospectus document and can compare them to other funds in its asset class using third-party data providers.
- Go further with LPL Research. We assess fund expenses as one factor in our 40-factor evaluation framework. Funds with expenses below the average for their investment category generally receive a green status in our framework. When fees are above average, we prefer to see this offset by strong net-of-fee performance and a reasonable explanation for the higher fee (such as higher costs of resources and data in complex assets). We also evaluate trading costs, such as explicit trading commissions and, for exchange-traded funds (ETFs), implicit costs such as the bid-ask spreads and premiums or discounts to net asset value (NAV).
Team-Based Management
- The evidence. Saurin Patel and Sergei Sarkissian published a paper in 2017 that found that team-based funds generally perform better than funds with a single manager.2 They also found that having too many PMs on a fund is associated with underperformance.
- On your own. You can find the names and basic biographic information about a fund’s PMs in its prospectus.
- Go further with LPL Research. Our Investment Manager Research team speaks with PMs on an ongoing basis. Sometimes we uncover nuances, such as key investment professionals who are not listed in the prospectus but still have important roles on the investment team. We also find situations where someone is listed in the prospectus as a PM who does not make day-to-day investment decisions for the fund, but rather provides an oversight function. Through our conversations with PMs and other key staff, we develop an opinion of the key contributors to a fund’s success, and we stand ready to adjust our opinion of the fund when key people depart. We also attempt to understand the communication dynamics on an investment team, as healthy two-way dialog about portfolio decisions may be helpful to performance.
Ownership of Fund Shares by PMs
- The evidence. An article by Khorana, Servaes, and Wedge (2007), as well as more recent studies, find that funds whose PMs invest their personal assets alongside investors tend to have better performance.3 Some observers believe this comes from managers having “skin in the game,” because they do better financially when the fund succeeds.
- On your own. You can find the PM’s ownership of fund shares in a fund’s Statement of Additional Information (SAI), which is typically available on the fund company’s website. Within the document, searching for the PM’s last name may help you find the relevant section among this lengthy document.
- Go further with LPL Research. We assess PM ownership as part of our 40-factor evaluation process. High ownership of fund shares tends to receive a green indicator in our framework, while little to no ownership tends to receive a yellow or orange indicator. If a fund manager does not own shares in the fund they manage, we typically inquire with the manager about this and determine whether the explanation addresses our concerns. For example, the PM may be aligned with shareholder interests in other important ways, such as through a well-designed performance-based compensation plan or investments in similarly managed portfolios.
Final Thoughts
We believe it is important for investors to consider a fund’s past performance and factors beyond performance. The importance of fund expenses, team structure and dynamics, and PM ownership of fund shares are well-supported by academic literature and our internal research. While investors can find relevant information in fund documents, our Investment Manager Research team dives much deeper. We do this by considering implicit as well as explicit costs, regularly speaking with PMs, and understanding how they are incentivized. We believe these are important aspects of our overall, holistic 40-factor evaluation framework for actively managed portfolios.
Footnotes
- Michael J Cooper, Michael Halling, and Wenhao Yang, 2021. “The Persistence of Fee Dispersion among Mutual Funds.” Review of Finance, European Finance Association, vol. 25(2), pages 365-402.
- Saurin Patel and Sergei Sarkissian, 2017. “To Group or Not to Group? Evidence from Mutual Fund Databases.” Journal of Financial and Quantitative Analysis, vol. 52(5), pages 1989-2021.
- Ajay Khorana, Henri Servaes, and Lei Wedge, 2007. “Portfolio Manager Ownership and Fund Performance.” Journal of Financial Economics, vol. 85, pages 179-204.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #1105267
