FUND EXPENSES
The SEC has found that for each percentage point of increased expense level in a fund, its annual return drops not just 1%, but 1.9%
1995
| Stock type | All | No Load | Load |
| Diversified US Stock | 1.29 | 1.17 | 1.42 |
| Small Company | 1.37 | 1.18 | 1.67 |
| Aggressive Growth | 1.72 | 1.67 | 1.83 |
| Growth | 1.28 | 1.16 | 1.40 |
| Growth and Income | 1.18 | 1.09 | 1.28 |
| Equity Income | 1.25 | 1.13 | 1.34 |
| International Funds | 1.77 | 1.48 | 1.95 |
| Diversified Foreign | 1.62 | 1.44 | 1.84 |
| European Stock | 1.90 | 1.66 | 2.12 |
| Pacific | 1.84 | 1.38 | 2.07 |
Bonds
| Corporate | 0.84 | 0.70 | 1.02 |
| Government | 0.91 | 0.71 | 1.06 |
| Municipal | 0.77 | 0.60 | 0.84 |
FUND FEES: (1995) Previously addressed, management expenses on mutual funds, for the most part, have been going up in recent years. And everything else being equal, you want the fund with the lowest fees. Money magazine calculated that of the "normal" 1.3% annual fee ($720 per year), brokerage fees took $66, Shareholder Services, $105; 12b-1 fees, $160; Investment Advisory Fee, $343; Custodian fee, $17 and other, $29. Mutual fund investors pay nearly twice as much as institutional investors. U.S. diversified stock funds have increased annual fees by about 35% over the past 16 years. 12b-1 fees just end up as additional sponsor profit. 87% of brokered sponsored funds have 12b-1 fees. Of the 4% load on a $10,000 investment, $105 went to the broker, $50 to the distributor, and $245 went to the brokerage firms. So if you pay a load and 12b-1 fees, you better be sure you've got a GREAT fund.
5/96 A WSJ article said that brokerage commissions cost an additional 3/10% but are as great as 1% for high turnover portfolios. It's exactly that reason why mutual funds hate people that try and time the market and buy and sell fund shares frequently. For every $1 million that flow in or out of a $100 million fund, a fund might pay out between $5,000 and $10,000 in trading commissions and other costs. It's undoubtedly why Vanguard added extra back end fees to many of their portfolios if you decided to get out too quickly.
MUTUAL FUND EXPENSES 1996: The expenses to run and manage a fund have been increasing during the last decade even while the size of the funds has increased almost exponentially. They should have been gong down. Anyway, per Kiplinger's here are the average expenses ratio for the various fund categories. If your fund has higher expenses, it doesn't mean they are necessarily bad but it should give you cause for further review.
| Stocks | |
| Aggressive Growth | 1.56% |
| Long Term Growth | 1.42 |
| Growth and Income | 1.32 |
| Sector | 1.69 |
| International and Global | 1.76 |
| Bonds | |
| High Quality Corporate | 0.93% |
| High Yield Corporate | 1.41 |
| Municipal | 0.98 |
| Government | 1.02 |
| Mortgage Securities (GNMA) | 1.11 |
HIGH FUND FEES: (1998) Jason Zweig recently indicated his maximum permissible levels of annual expenses by fund category: investment-grade bonds, 0.75%; junk bonds, 1.00%; big U.S. stocks, 1.00%; small U.S. stocks or sectors (like real estate or technology), 1.25%; foreign stocks, 1.50%. If you buy a fund with higher expenses than these, you should have your head examined. (And maybe your pocketbook)
References on Fund Fee Articles by Jason Zweig:
Mark M. Carhart, "On Persistence in Mutual Fund Performance," The Journal of Finance, Vol. 52, No. 1 (March, 1997), pp. 57-82. Studying 1,892 diversified U.S. stock funds from 1963 to 1993, Carhart finds that "expense ratios appear to reduce performance a little more than one-for-one" (specifically, an increase of 1 percentage point in annual expenses reduces annual return by 1.54 percentage points).
Martin J. Gruber, "Another Puzzle: the Growth in Actively Managed Mutual Funds," The Journal of Finance, Vol. 51, No. 3 (July, 1996), pp. 783-810. Gruber looks at 227 diversified U.S. stock funds from 1985 to 1994 and establishes that funds with low expenses consistently outperform those with high expenses. "The top ranked funds have fees that are...lower than the bottom deciles."
Ronald N. Kahn and Andrew Rudd, "Does Historical Performance Predict Future Performance?" Financial Analysts Journal, Nov.-Dec., 1995, pp. 43-52. Kahn and Rudd analyze 300 equity funds from 1983 to 1993 and determine that there is "a strong persistence of strong underperformers, achieved through large fees and expenses."
Burton G. Malkiel, "Returns from Investing in Equity Mutual Funds, 1971 to 1991, The Journal of Finance, Vol. 50, No. 2 (June, 1995), pp. 549-572. Malkiel studies all diversified U.S. stock funds over a 21- year period and concludes, "in general, mutual funds do not achieve gross investment returns sufficient to justify the management expenses they incur."
Ravi Shukla and Charles Trzcinka, "Persistent Performance in the Mutual Fund Market: Tests with Funds and Investment Advisers," Review of Quantitative Finance and Accounting, Vol. 4, No. 2 (June, 1994), pp. 115-135. Covering 1,387 funds and 243 fund advisers from 1979 to 1989, this study finds that "there is little persistence of performance rankings among positive performers while there is significant persistence in poor performers," mainly because of high expenses.
And when William Sharpe, professor of finance at Stanford and winner of the 1990 Nobel Prize in economics, was asked how to pick a mutual fund, he answered: "The first thing to look at is the expense ratio."
In summary, expenses have been going up while the funds have grown. Economy of scale would have suggested otherwise. But while the market is booming, not too many are complaining. However, once the market calms and returns moderate, expenses will finally become a major focus of investors- particulary those investing in bonds. Since bond returns are traditionally based on the stated yield, high fees simply take away from an investor's return without, normally, providing anything additional of value.
12b-1 FEES: 1998 These are extra fees levied on mutual funds for the additional marketing by the fund after the purchase. The average annual expense ratio of stock funds with no 12b-1 fee is 1.20% (still too high). The average annual expense for all stock funds WITH a 12b-1 fee is 1.82% (shoot me). Bond funds are little different. The average bond fund as an expense ratio of 0.80%. Those with 12b-1 fees are at 1.27%. With a stock fund, you may get enough gain to offset the fee. With a bond fund, that is nigh on to impossible so you are always behind the eight ball.
LOADED FUNDS OUTPRODUCE NO LOADS: (Ticker Magazine 1998) Seems like an impossibility doesn't it? Not quite. Dalbar looked at the returns investors actually received and concluded that over the 12 year period ending in 1995, investors using direct marketed equity funds (no loads) had total returns of 97.9%, while those sold by an broker with a load produced a 114%. At first glance this doesn't make sense, but when you add in the psychology of various investors, it becomes very clear as to what is happening.
While I might rail at the fact that brokers have little training, it is still usually greater than that of the average investor. This increased understanding of the marketplace normally dictates that monies stay invested for longer term growth rather than going in out and attempting market timing as many individual investors to. Hence, though an individual investor is paying less for the no load funds, they lose that edge and more as they try to move in out of the market for some supposedly extra gain. They just haven't done their homework and it shows.
FUND FEES (ICI). (2000) A study indicates that loaded mutual fund fees for stocks have reduced to 1.5% from 2.3% in 1980 while no load funds increased to 0.89% from 0.78%; bond funds dropped to 1.16% from 1.54% and money market funds reduced to 0.46% from 0.54%.
LOADED VERSUS NO LOAD FUNDS (Ticker) (2000) "The percentage of mutual fund sales coming directly through the mail or toll free numbers has dropped to 19% of total sales from 32% in 1990. Financial Research Corp- who did the study- says that is probably due to the fact that only about 1/3 of the population is self motivated to do some homework. (Though being self motivated and knowledgeable may be, nonetheless, mutually exclusive.) But no loads hold a solid 40% of the business. They note that the biggest increase is the fee based business where it is estimated that up to 20% of all investment professionals conduct all or part of their business on a fee only basis- up from 5% to 7% just a year ago. (Most still don't know what they are doing. The investments mostly went up not because of them, but the economy, Greenspan et al. Further, you need to remember that there really is NO such thing as fee only financial planning. Don't believe me? Read Who Can You Trust.)
Fund Fees (Will McClatchy, Jim Wiandt 2000) Mutual fund investors this year will overpay Wall Street $36 billion to manage stocks, bonds, and real estate totalling $3.7 trillion. Nearly 1% per year of assets are wasted in unnecessary fees, according to IndexFunds' comprehensive new survey of mutual fund fees.
# of funds considered 8,545
Total invested ($millions) $3,738,342,970,000
Fees actually paid ($millions) $46,967,540,861
Ave. actual annual expense ratio 1.26%
Ave. benchmark fund expense ratio 0.29%
Projected unnecessary expense 0.97%
Total $ wasted ($millions) $36,188,973,586
List of Benchmark Funds for 41 Investment Categories
| Fund Name | Symbol | Investment Category | No. in Category | Rank in Assets | Benchmark Fees | Excess Fees % | Excess Fees (Category) |
| Vanguard Aggressive Growth | VHAGX | Aggressive Growth |
152
|
31
|
0.46%
|
1.25%
|
1,305,133,872.00
|
| Vanguard Life Strategy-Mod Gr | VSMGX | Asset Allocation - Domestic |
234
|
4
|
0.29%
|
0.90%
|
730,921,418.00
|
| First American-Strategy Income | FSFIX | Asset Allocation - Global |
52
|
23
|
0.30%
|
1.57%
|
205,890,368.00
|
| Vanguard Index-Balanced Ptfl | VBINX | Balanced - Domestic |
313
|
7
|
0.20%
|
0.81%
|
872,453,199.00
|
| Scudder Pathway Balanced Port | SPBAX | Balanced - Global |
18
|
3
|
1.14%
|
0.83%
|
14,312,833.00
|
| Vanguard Convertible Fund | VCVSX | Convertible |
43
|
7
|
0.55%
|
1.13%
|
89,636,373.00
|
| Vanguard Fixed-High Yield | VWEHX | Corporate - High Yield |
265
|
1
|
0.28%
|
1.31%
|
1,064,958,267.00
|
| Dreyfus Bond Market Index Basic | DBIRX | Corporate - Investment Grade |
125
|
2
|
0.15%
|
0.56%
|
122,404,875.00
|
| Vanguard Emerging Mkts Stock Idx | VEIEX | Emerging Market Equity |
76
|
1
|
0.58%
|
1.49%
|
157,214,987.00
|
| Fidelity New Markets Income | FNMIX | Emerging Market Income |
18
|
1
|
1.09%
|
0.60%
|
5,613,054.00
|
| Vanguard Equity Income | VEIPX | Equity Income |
198
|
8
|
0.41%
|
0.54%
|
728,473,221.00
|
| State Farm Interim Fund | SFITX | General Bd - Investment Grade |
324
|
82
|
0.19%
|
0.78%
|
441,574,894.00
|
| Vanguard Bond Index-Long Term Bd | VBLTX | General Bd - Long |
10
|
3
|
0.20%
|
0.25%
|
9,098,667.00
|
| Vanguard Bond Index-Total Bd Mkt | VBMFX | General Bd - Short & Interm |
102
|
1
|
0.20%
|
0.30%
|
75,781,838.00
|
| Trust for Credit Uns-Mortgage | TCUMX | General Mortgage |
65
|
6
|
0.29%
|
0.85%
|
75,163,678.00
|
| Vanguard Global Equity Fund | VHGEX | Global Equity |
320
|
95
|
0.71%
|
0.76%
|
1,561,987,840.00
|
| Payden & Rygel Global Fixed Inc R | PYGFX | Global Income |
196
|
11
|
0.49%
|
0.89%
|
563,757,133.00
|
| Vanguard Growth Index Fund | VIGRX | Growth - Domestic |
1200
|
12
|
0.12%
|
1.22%
|
13,119,974,377.00
|
| Vanguard Tax Managed-Gr & Inc | VTGIX | Growth & Income |
592
|
48
|
0.19%
|
0.98%
|
4,804,795,544.00
|
| Van Kampen Pr Rate Inc | VKPRX | Loan Participation |
13
|
1
|
1.36%
|
0.14%
|
32,953,526.00
|
| Dreyfus MidCap Index Fund | PESPX | Mid Cap |
233
|
34
|
0.50%
|
0.98%
|
1,122,007,719.00
|
| Northeast Investors Trust | NTHEX | Multi-Sector Bond |
110
|
6
|
0.61%
|
0.94%
|
315,100,646.00
|
| Vanguard Muni-High Yield | VWAHX | Municipal - High Yield |
68
|
4
|
0.18%
|
0.74%
|
221,100,105.00
|
| Vanguard CA Tax Free Insd-IT | VCAIX | Municipal - Insured |
120
|
6
|
0.17%
|
0.48%
|
121,358,112.00
|
| Vanguard Muni-Intermediate | VWITX | Municipal - National |
374
|
1
|
0.18%
|
0.62%
|
532,277,696.00
|
| Evergreen NC Muni Bond Y | ENCYX | Municipal - Single State |
1072
|
90
|
0.23%
|
0.80%
|
804,492,039.00
|
| Vanguard Europe Stock Index Fund | VEURX | Non-US Equity |
720
|
7
|
0.29%
|
1.17%
|
2,658,834,250.00
|
| Vanguard 500 Index Fund | VFINX | S&P 500 Index |
68
|
1
|
0.18%
|
0.15%
|
236,286,476.00
|
| Vanguard Specialized-Energy | VGENX | Sector - Energy/Natural Res |
56
|
1
|
0.48%
|
0.77%
|
41,204,876.00
|
| Century Shares Trust | CENSX | Sector - Financial Services |
47
|
12
|
0.82%
|
1.32%
|
154,656,527.00
|
| Price (T. Rowe) Hlth Sciences | PRHSX | Sector - Health/Biotechnology |
44
|
7
|
1.11%
|
0.63%
|
137,360,211.00
|
| Price (T. Rowe) New Amer Growth | PRWAX | Sector - Other |
42
|
2
|
0.94%
|
0.35%
|
30,703,951.00
|
| Vanguard Specialized-Gold | VGPMX | Sector - Precious Metals |
30
|
1
|
0.77%
|
1.03%
|
14,741,442.00
|
| Vanguard Specialized-REIT Index | VGSIX | Sector - Real Estate |
78
|
2
|
0.33%
|
0.29%
|
58,619,801.00
|
| Price (T. Rowe) Sci & Tech | PRSCX | Sector - Tech/Communications |
88
|
1
|
0.87%
|
1.00%
|
1,181,214,033.00
|
| Vanguard Specialized-Utilities | VGSUX | Sector - Utilities |
92
|
10
|
0.40%
|
1.01%
|
380,935,069.00
|
| Vanguard Index Tr Sm-Cap Idx Fd | NAESX | Small Cap |
526
|
7
|
0.25%
|
1.33%
|
1,564,850,516.00
|
| Vanguard Fixed-Long Term UST | VUSTX | US Government - Long |
23
|
1
|
0.28%
|
0.33%
|
8,125,580.00
|
| Vanguard Fixed-Sh Term Federal | VSGBX | US Government - Short & Interm |
166
|
1
|
0.27%
|
0.66%
|
115,414,267.00
|
| Vanguard Fixed-GNMA | VFIIX | US Government/Agency |
229
|
1
|
0.27%
|
0.71%
|
478,733,193.00
|
| Vanguard Fixed-Interm Treasury | VFITX | US Treasury |
43
|
1
|
0.27%
|
0.27%
|
19,240,585.00
|
Load Funds do better? (2001) 60 percent of all mutual fund assets remain invested in load funds. (NY Times) Past academic studies have shown that the average load fund manager performs no differently than the average no-load manager. That is already bad news for load funds, because it removes the performance-based justification for investing in them.
But recent studies note that even before the impact of loads, the average load fund underperforms the average no-load. After loads are taken into account, needless to say, the average load fund lags far behind.
A 1996 study by Mark Carhart examined all domestic diversified equity mutual funds from January 1962 to December 1993. Little noticed at the time was Mr. Carhart's discovery that the average load fund lags behind the average no-load by approximately 60 basis points a year, even before loads are taken into account — equivalent to more than 6 percent over a decade. (See, "On Persistence in Mutual Fund Performance," appeared in the March 1997 issue of the Journal of Finance.)
Matthew R. Morey, a Pace University finance professor, focused on all domestic diversified equity funds existing at the end of 1992. (His working paper, "Should You Carry the Load? A Comprehensive Analyst of Load and No-Load Fund Out-of-Sample Performance," is at papers.ssrn.com/sol3/papers.cfm?abstract_id=265133.) Two factors conspired to keep this result hidden from researchers for so many years.
The first is a statistical flaw known as survivorship bias. This creeps into any mutual fund research that focuses only on funds that exist today (the "survivors") and ignores those that have gone out of business over the years (the "nonsurvivors").
Serious as survivorship bias is, it still would not have affected comparisons between loads and no-loads if not for the fact that more load funds go out of business than no-loads. In fact, according to Mr. Carhart's study, more than 90 percent of funds that went out of business from 1962 to 1993 were charging either a front-end or a back-end load at the time they disappeared.
If these two studies had not corrected for survivorship bias, we might not have known that the typical load fund underperforms the no-load. But now that we know, we face another mystery: Why hasn't the intense competition among mutual funds for investors' assets removed this performance difference?
At least two factors are involved, both revealing much about the psychology of investing.
The first is that the payment of a load discourages investors from switching to another fund. That, in turn, helps to immunize inferior load funds from the redemptions that equally inferior no-load funds would experience. As a result, load funds are relatively invulnerable to the competitive pressures that otherwise might eliminate the performance difference.
How much more reluctant are load-fund investors to switching? One gauge is the average time that investors hold on to load and no-load funds. According to Dalbar, a financial research firm based in Boston, the average load fund investor in 1996 held on to his equity fund for 3.2 years, in contrast to 2.9 years for the typical no-load fund investor.
Undoubtedly, many psychological motivations influence load-fund investors to hang on to their funds. Maybe some investors see load funds as well worth the extra cost, because of the help they receive from the sales representative. If so, it would take poor performance over a sustained period to persuade investors to switch.
But investors are often reluctant to switch even if they place no value on the hand-holding they receive and even when their fund is a poor performer. This is because of cognitive dissonance, a universal psychological trait that makes us loath to acknowledge our mistakes — even to ourselves. Load- fund investors thus hold on longer than they would otherwise in order to avoid the painful realization that the money paid to the fund's sales representative was a total waste.
A second factor is related to the first. Load-fund investors' reluctance to switch has helped them at the same time that it has hurt them: They tend to have a higher average exposure to equities than do no-load investors, whose frequent switching leads to a higher exposure to cash.
The resulting benefit to load-fund investors is significant. According to Dalbar, the average equity investor in load funds from 1984 to 1996 made 118.8 percent, in contrast to 113.9 percent for the average no-load fund investor.
In other words, despite the lesser performance of the average load fund, average load fund investors are making more money. As a result, they are probably not aware that they could have made even more by investing in no-loads — if, of course, the absence of loads didn't tempt them into moving their money around.
But as is the case with most psychological hang-ups, consciousness is a big step toward change. When no one knew that the average load fund lagged behind the average no- load, investors had no motivation to find an alternative source of discipline. Now that we know, and given the magnitude of some funds' loads, investors have a powerful incentive to find a way to behave more like a load-fund investor while investing in a no- load fund."
FEES: The average expense ratio for loaded funds- including 12(b)-1 is 1.52%. For bonds it is 1.1%. (2001)
Loaded funds (USA Today 2001) In 1999, 69.5% of all new money invested in mutual funds went to no-loads. This year, it's 47.5%. At Dreyfus, 90% of new money is coming from brokers and advisers. Last year, Invesco raised $10 billion in new money. Less than 5% of that came from direct investors.
Load vs no-load: (USA Today 2002) , load funds are by far the biggest sellers in mutual fund land. Only a small slice of fund purchases — about 18% — come from people who call a fund company, ask for a prospectus, and send in a check. The rest, mostly load funds, are purchased through an intermediary, such as a financial planner, a stockbroker, or a corporate 401(k) account.
The average diversified U.S. stock fund that carries a sales charge has risen an average 7.60% the past five years, according to Morningstar. True no-load funds — those that charge no front sales charge and no 12b-1 marketing fee greater than 0.25% — rose 8.77%. But the loaded fund figures are deceiving in that the load was not figured in. You got to be careful scrutinizing the numbers.
The average front-end load fund has a 1.33% annual expense ratio, vs. 1.09% for no-load funds. Of course, if you use no loads with a 1.09% expense ratio, you should have your head examined. Look at Vanguard- the fees on average will be at least half that. There are fewer no-load funds (783) than load funds (845).
Loads: (WSJ 2002) two-thirds of the 2,600 new mutual funds created in the past two years charge a load. Last year, some three-quarters of new dollars flowing into mutual funds went to load funds, compared with 62% in 1999. And not only are there more funds with loads, but the loads themselves are getting heavier. The average load today is 5.2%, according to Financial Research Corp., a Boston consulting firm, up from 4.86% five years ago.
Low fees and good returns (2002) "Companies who tend to charge under 1% [fees] seem to have generally done better than those who charge more than 1%."
401(k) Fees (Hewitt, USA Today) About one-third of large plans take administrative fees out of worker assets.
Administrative fees. These pay for record-keeping, postage, accounting, legal and trustee services. In addition, many plans offer educational seminars, Internet retirement planning services and access to customer service representatives.
The typical cost for administrative services ranges from $75 to $150 a year per employee in the plan.
Individual service fees. These pay for optional services. For example, you may have to pay a fee if you take a loan from the plan. Some plans offer a brokerage account option, which lets you buy individual stocks. You will typically pay $100 a year to use this option, plus commissions, according to Hewitt.
Investment management fees. They typically account for about 70% of the total plan cost, Hewitt says. These are generally the same types of fees you pay when you buy a mutual fund on your own and are usually stated as a percentage of the amount of assets you've invested in the fund.
Average expense ratios for selected mutual fund categories: (2002)
Category Total expense ratio
Balanced funds 1.28%
Equity income funds 1.42%
Global funds 1.86%
Institutional money mkt. funds 0.44%
Intermediate bond funds 0.90%
International funds 1.69%
Large-cap growth funds 1.54%
Large-cap value funds 1.38%
Midcap growth funds 1.67%
Midcap value funds 1.55%
Money market funds 0.90%
S&P 500 index objective funds 0.65%
Short-term bond funds 0.81%
Small-cap growth funds 1.71%
Small-cap value funds 1.60%
Source: Lipper , July 2002
Fund fees (WSJ, Lipper 2003) Fund expense ratios have been rising for a while, partly due to simple mathematics. As fund assets have declined with declining stock values, the expense ratio pulls in less money to pay for firms' fixed operational costs. To compensate, funds have been boosting the ratio. The median stock fund's expense ratio, 1.46%, which covers management and back-office costs, is up 9% since 1999
Fund fees: Fees at the largest stock mutual funds rose 11% between 1999 and 2001, reversing a five-year trend of declining fund charges paid by investors, according to a draft of a General Accounting Office report expected to be released Wednesday.
The study found the average annual expenses paid by stock-fund shareholders rose to 0.7% of assets in 2001 from 0.63% in 1999. The average was "asset weighted," meaning it was adjusted to give the largest funds more impact on the results. For a $100,000 fund account, the 11% increase represents a $70 difference in cost yearly.
John Bogle notes, In 1978, mutual funds held $56 billion of assets and carried a 0.91% expense ratio, on average. Today, mutual funds have more than $6 trillion in their coffers, and the average fund carries a 1.36% expense ratio,.
Also, he compares the expense ratios of the nation's 25 largest funds in 1951 with the same funds' fees now. In 1951, their fees averaged 0.64%. Today, 22 of the funds are still in business, of which 19 have higher fees. Their average expense ratio in 2002 was 1.06%.
Going up: average expenses — the amount taken by the company that runs a fund — had risen from an average 0.73% of a fund's assets in 1979 to 0.94% in 1999. Much of that increase was because of 12b-1 marketing charges, which go for advertising funds and paying brokers to sell them.
Mutual Fund Fees (NY Times 2003) how much did investors pay to stock and bond fund managers in the most recent 12 months? More than $35.2 billion, according to Max Rottersman, president of FundExpenses.com, a research firm that analyzes fund costs for institutional clients. That represents 0.86 percent of assets in these funds.
Mr. Rottersman breaks the fees into four groups. The largest is adviser fees, which totaled $21 billion or 0.52 percent of assets. Other fees, including the self-serving 12b-1 charges fund companies use to attract new money, totaled $9.2 billion, or 0.23 percent of assets. Shareholder servicing fees added $5.6 billion, or 0.14 percent, and custodian fees brought in $537 million, or 0.01 percent.
Fund costs:
Fund Size
Fund changes
Fund economies
Fund markets
Fund flows:
Fund owners (All charts from Bogle)
Flawed load funds. Here are costs of "running" such funds:
1. - 0.5% for annual impact of Sales commission. Most actively-managed funds are sold by brokers who get a commission in the six percent range. Of course they really don't do a damn thing for you, but the managers give the broker a commission to hustle assets. So deduct at least 0.5 percent to account for the annual impact of the commission.
2. Cash drag for another 0.6%. Actively managed funds have much higher cash reserves than an index fund. The effect of this "opportunity cost" or cash drag is a deduction of another 0.6 percent.
3. 0.7% Transaction costs. Fund managers have lots of fun buying and selling stocks, playing big-shot with your money. In fact, the typical turnover ratio is close to 100 percent annually -- that is, they're turning over their entire portfolio every single year. Bogle is a bit more conservative than Aronson in his analysis, and deducts just 0.7 percent for transaction costs.
4. 1.5% for 12(b)1 Management fees and expenses. Now subtract another 1.5 percent for the reported fees and expenses that the fund managers charge investors, including the useless and misleading 12(b)1 marketing fee.
5. 0.7% to 2.7% for Taxes. But that's not all. Now Uncle Sam wants his cut of the profits in your taxable accounts. And since that depends on an individual's bracket, it could be anywhere up to 2.7 percent. But let's be ultra-conservative at 0.7 percent.
6. 3.3% for commissions, costs, cash drag, and fees. Gross, pretax and after-tax investor return. Let's suppose your fund is generating a nice average gross annual return of 12 percent on total assets over the long term. The commissions, costs, cash drag and fees reduce that to 8.7 percent pretax. In short, the manager has already cost you 3.3 percent. Or to put it another way, the fund is underperforming the market by 3.3 percent. After-tax, what's left for the investor? No more than 8 percent of the original 12 percent is left. Less than two-thirds of your fund's returns get into your pocket, probably much less.
Future Percentage Loss From Compounding Costs
Expense Ratio (%) Length of Investment Horizon
5 Years ($) 10 Years ($) 20 Years ($) 30 Years ($) 40 Years ($)
0.10 -0.45 -0.91 -1.80 -2.69 -3.57
0.15 -0.68 -1.36 -2.69 -4.01 -5.31
0.20 -0.91 -1.80 -3.57 -5.31 -7.02
0.25 -1.13 -2.25 -4.45 -6.60 -8.70
0.50 -2.25 -4.45 -8.71 -12.77 -16.66
0.75 -3.36 -6.61 -12.79 -18.56 -23.94
1.00 -4.46 -8.73 -16.69 -23.96 -30.60
1.25 -5.55 -10.80 -20.43 -29.03 -36.69
1.50 -6.63 -12.83 -24.01 -33.76 -42.26
2.00 -8.77 -16.76 -30.72 -42.33 -52.00
2.50 -10.86 -20.54 -36.86 -49.83 -60.13
Source: Albert J. Fredman, AAii Journal May 2002
Mutual fund fees: (2004) Florida State University professor Stewart Brown compared the fees that pension funds for public employees paid to advisory firms — stock pickers — with what mutual funds paid for the same services. Brown found that mutual funds paid on the order of $560 per $100,000 in assets invested. Pension funds, by contrast, paid only $280. Indeed, The Alliance Premier Growth Fund paid Alliance Capital Management $970 per $100,000 in assets — compared with $160 that Florida’s public pension paid for the same Alliance portfolio manager working toward the same investment objective.
The disparity held true even in S&P 500 index funds, where stock picking isn’t an issue. Brown found index funds paid $200 per $100,000, compared with the $14 that pension funds paid. Thrifty Vanguard paid only 10 cents per $100,000.
Why the difference in fees for equity mutual funds and pension funds? No competition
Costs matter: (NY Times) In the first half of 2004, a majority of actively managed equity funds underperformed the stock indexes they are supposed to beat.
Standard & Poor's, which conducted the study, found that only 37 percent of actively managed large-cap funds beat the Standard & Poor's 500-stock index of large stocks through June. Fewer than 43 percent of midcap funds beat the S.& P. 400 midcap index. And only 10 percent of small-cap funds beat the S.& P. 600 index of small stocks.
the majority of actively managed funds are trailing their benchmark indexes in all nine major domestic stock fund categories: large growth, large value, large blend, midcap growth, midcap value, midcap blend, small growth, small value and small blend. It has been pretty much the same story over the past five years - a majority of actively managed funds in eight of these nine categories have been beaten by their indexes.
typical fees, or expense ratio, on an actively managed large-cap fund might be a little more than 1 percent of assets. By contrast, the average expense ratio of a large-cap index fund - which simply buys and holds all the stocks that compose a market index like the S.& P. 500 - is only around 20 basis points,
Very important- also note that a fund's total expense ratio does not include all of its fees. For example, every time a fund manager buys or sells stocks, he or she is likely to incur brokerage commissions. Those transactional fees, which like other expenses come out of the fund's performance, are not included in the expense ratio.
A study released earlier in the year by the fund tracker Lipper Inc. found that on a dollar-weighted basis, trading commissions at an average actively managed stock fund took away around 0.20 percentage point of performance in 2003. Among large-cap growth funds, it was 0.40 percentage point. And in several dozen instances, fund commission expenses exceeded a portfolio's total expense ratio.
S&P found that equity funds that traded stocks less frequently than average beat higher-than-average turnover portfolios in all nine domestic stock fund categories over the three-year and five-year periods ending Sept. 30, 2003.
Compounding matters, funds that charge high expenses also tend to have higher-than-average turnover
Fees: (2004) In a review of the fees being levied upon investors by equity mutual funds, Standard & Poor’s has determined that funds with lower than average expense ratios are continuing to outperform their more expensive peers over the long-term. According to Standard & Poor’s database of over 17,000 US mutual funds, funds charging smaller than average fees to investors outperformed their more expensive counterparts in eight out of the nine investment styles over a one-, three-, five-, and ten-year annualized basis. The only investment style to buck the trend is mid-cap blend, whose five- and ten-year annualized returns outpaced their less expensive peers.
Fund Fees (Zero Alpha Group 2005) U.S. investors in equity mutual funds are paying $17.3 billion in hidden mutual fund trading costs that are not reported openly in the stated expense ratios of mutual funds. trading costs were, on average, 43.4 percent as large as reported mutual fund expense ratios. For many mutual funds, these costs of trading exceed stated expense ratios. According to the study: “46 percent of all small cap funds have “all-in” trading costs that are higher than the annual expenses investors pay. 21 percent of mid cap funds fall into that category as do 7 percent of all large cap funds. In the small-cap category, 17 percent of all funds have implicit trading costs that are twice the level of annual expenses.”
growth funds have higher than average trading costs as a percent of annual expenses: The growth funds are broken down into large cap growth (with trading costs averaging 43.1 percent of stated expense ratios), mid-cap growth (86.0 percent), and small-cap growth (123.2 percent). Hidden expenses for value funds are lower than with growth funds.
One of the starkest conclusions from the study was the difference in trading costs between index funds and actively managed funds. The total trading costs of active funds were 0.48 percent per year. The trading costs of index funds averaged 0.064 percent per year. Study author O’Neal said: “That investors in actively-managed funds incur portfolio trading costs that are over seven times that of index fund investors is another in the long line of reasons for investors to favor index funds.”
Fees: the average U.S.- stock fund pays 0.71% of assets each year for portfolio management; this and other charges add up to total expenses averaging 1.51%, according to Morningstar. Yet Vanguard's total expenses for the S&P 500 is 0.18. Sure you can beat the S&P average- but you have to take extra risk or be very, very good in order to do so.
12b-1 Fees: (2005) Ever wonder where mutual fund fees go?
Ongoing shareholder services: 52%
Compensation to financial advisers for initial assistance: 40%
Payment to fund underwriters: 6%
Promotion and advertising: 2%
Commissions on mutual fund stocks: (Plexus, WSJ 2005) Since 2002, the average commission that institutions, including mutual funds, paid to trade shares listed on the New York Stock Exchange has dropped 20% to 3.8 cents a share from 4.8 cents a share, according to the latest data from Los Angeles trading consultant Plexus Group. Ten years earlier, these investors paid an average of nearly six cents a share. For Nasdaq Stock Market-listed stocks, the average commission also has fallen and now stands at about 3.5 cents a share.
More fund Analysis: (John Haslem, David Smith and H. Kent Baker) funds with the highest expense ratios are associated with more risky (less diversified) portfolios with higher P/E ratios, larger betas, smaller R-squared ratios and larger standard deviations of returns. Funds with very excessive and most excessive expense ratios are also associated with lower portfolio diversification, including smaller bond allocations and a more concentrated percentage of assets in the top ten stock holdings. Further, these high cost funds are associated with lower returns because of larger portfolio turnover (with commensurately higher trading costs), larger allocations of low-return cash assets, and smaller, less costefficient net asset sizes.
Portfolio risk is higher along several dimensions that include larger systematic risk relative to the market (beta), larger unsystematic (diversifiable) risk (R-squared) and larger total risk (standard deviation of returns). Thus, these funds not only face inevitable undiversifiable market risk, but also larger than necessary diversifiable risks.
These findings are supported by common measures of risk/reward analysis, average annual return comparisons and other performance measures. Funds with the two highest categories of expense ratios had the:
• Smallest Sharpe Ratio scores (-0.40 and –0.37)
• Smallest Jensen Alphas over three years (-0.82% and –0.67%)
• Lowest Morningstar Star Ratings (1.33 and 2.27)
• Lowest annualized total returns over three years (–6.78% and –6.25%)
• Lowest annualized total returns over five years (-6.44% and –1.7%)
Jensen Alpha considers only systematic (beta) risk. Alpha is the difference between actual and expected portfolio returns given portfolio systematic risk. The market index has a defined alpha of zero. Significant positive Jensen Alphas suggest evidence of portfolio managers with superior market timing and/or stock picking abilities.
Funds with very excessive and most excessive expense ratios are associated with the smaller (largest negative) Jensen Alphas, suggesting that the funds’ portfolio managers have negative or zero superior stock picking abilities.
* funds with excessive expense ratios also have negative portfolio characteristics, including higher risk, higher trading costs and lower earnings. In other words, investors in these funds are getting hit twice: They’re paying high fees while getting poor performance and risky portfolios in return.
mutual funds with high expense ratios—whether two or three standard deviations above the mean of their Morningstar category— are further associated with both negative portfolio characteristics and performance attributes.
John A. Haslem is Professor Emeritus of Finance in the Robert H. Smith School of Business at the University of Maryland in College Park. David M. Smith is associate professor of Finance at the University of Albany (SUNY). H.Kent Baker is university professor of Finance in the Kogod School of Business at American University in Washington,D.C.
Fund fees: (Morningstar 2005) the mutual-fund industry's overall expense ratio hasn't changed much in the past 15 years. Mutual-fund assets grew to $6.2 trillion in 2004, from $550 billion 1989, while expenses climbed to $55 billion from $5 billion during the same period. However, expenses rose in 13 of the top 20 fund families.
"Expense ratios are the best predictors of performance -- way better than historical returns. "You'd be better off randomly picking a fund with expenses in the cheapest quartile and past returns in the worst quartile than a fund with returns in top quartile and expenses in the highest quartile."
Out of the 11 criteria, the expense ratio was the only one that had sufficient statistical relevance in predicting fund performance. Funds with low operating costs "deliver above-average future performance across nearly all time periods,"
The expense ratios of 19 of these fund families are anywhere from two to five times higher than the family with the lowest expenses.
Funds in the two most expensive categories differ markedly from funds with lower expense ratios. When compared with other funds, funds falling into the top two standard deviations had, on average:
• The highest average P/E ratios (22 and 21)
• The lowest dividend yields (0.74% and 0.91%)
• The highest beta (1.13 and 1.05)
• The smallest R-squared values (67 and 70)
• The largest standard deviation for returns over a five-year period (25.7 and 25.6)
• The largest cash allocations (8.2% and 7.4%)
• The smallest bond allocations (0.18% and 0.19%)
• The smallest net assets ($15 million and $16 million)
• The highest portfolio turnover (558% and 153%)
• The highest percentage concentration of top 10 holdings (50.3% and 39.7%)
Generally, then, funds with the highest expense ratios are associated with more risky (less diversified) portfolios with higher P/E ratios, larger betas, smaller R-squared ratios and larger standard deviations of returns. Funds with very excessive and most excessive expense ratios are also associated with lower portfolio diversification, including smaller bond allocations and a more concentrated percentage of assets in the top ten stock holdings. Further, these high cost funds are associated with lower returns because of larger portfolio turnover (with commensurately higher trading costs), larger allocations of low-return cash assets, and smaller, less cost efficient net asset sizes.
Portfolio risk is higher along several dimensions that include larger systematic risk relative to the market (beta), larger unsystematic (diversifiable) risk (R-squared) and larger total risk (standard deviation of returns). Thus, these funds not only face inevitable undiversifiable market risk, but also larger than necessary diversifiable risks.
These findings are supported by common measures of risk/reward analysis, average annual return comparisons and other performance measures. Funds with the two highest categories of expense ratios had the:
• Smallest Sharpe Ratio scores (-0.40 and –0.37)
• Smallest Jensen Alphas over three years (-0.82% and –0.67%)
• Lowest Morningstar Star Ratings (1.33 and 2.27)
• Lowest annualized total returns over three years (–6.78% and –6.25%)
• Lowest annualized total returns over five years (-6.44% and –1.7%)
Use of the Sharpe Ratio, a reward-to-variability ratio, is quite appropriate because mutual funds with very excessive and most excessive expense ratios are associated with less than fully diversified portfolios. The ratio uses a benchmark based on the capital market line and relates portfolio abnormal mean returns for a given period to total risk using the standard deviation of returns.
The findings that mutual funds with very excessive and most excessive expense ratios are associated with smaller Sharpe Ratios indicate that these fund portfolio managers deliver performance with zero or negative abnormal returns per unit of risk.
Jensen Alpha considers only systematic (beta) risk. Alpha is the difference between actual and expected portfolio returns given portfolio systematic risk. The market index has a defined alpha of zero. Significant positive Jensen Alphas suggest evidence of portfolio managers with superior market timing and/or stock picking abilities.
Our findings, however, show that funds with very excessive and most excessive expense ratios are associated with the smaller (largest negative) Jensen Alphas, suggesting that the funds’ portfolio managers have negative or zero superior stock picking abilities.
Let's be cheap put there: (2006) "Low expenses are the only reliable predictor of performance
The ten predictors tested by FRC included: Past performance, Morningstar ratings, expenses, turnover, manager tenure, net sales, asset size, and four risk/volatility measures, alpha, beta, standard deviation and the Sharpe ratio. FRC's conclusions were quite significant¬"only one of the ten predictors was of any help in predicting future performance.
That's right, of all the predictors, FRC concluded that the expense ratio is the only real reliable one in predicting future performance because funds with low operating costs "deliver above-average future performance across nearly all time periods." Conversely, all other predictors turned out to be unreliable - "including Morningstar's famed ratings and the highly-regarded Sharpe Ratio developed by a Nobel Laureate."
Why Do Investors Choose High-fee Mutual Funds Despite the Lower Returns? (2006)
With their combination of low fees, tax efficiency and simple, autopilot investing style, index funds seem to have captivated American investors. At the same time, however, many investors still hold trillions of dollars in high-fee funds despite well-publicized evidence that low-fee alternatives offer higher returns over the long run. "It struck us that most people just don't know what mutual fund fees are. So we set out to actually test that," says Brigitte C. Madrian, professor of business and public policy at Wharton. The result is a paper titled, "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," by Madrian, Yale professor James J. Choi and Harvard economics professor David Laibson.
Investors appear to have a poor grasp of the fee issue, failing to minimize fees even when the benefits are presented in a clear and incontrovertible disclosure.
Paying a broker: (2006) we estimate that mutual fund investors may have paid as much as $3.6 billion in front end loads in 2002, $2.8 billion in back-end loads and another $8.8 billion in 12b-1 fees, in addition to the $23.8 billion paid in 2002 for investment management fees and other operational expenses.
Funds sold through the broker channel do not appear to charge lower non-distribution fees; brokers are not directing investors to less expensive funds. Brokered funds do not perform better than direct-channel funds. We find that funds sold through the broker channel have lower raw and risk adjusted returns than direct-channel funds, even before distribution expenses are deducted. Broker-sold funds reflect different asset allocations that change over time, but when risk-adjusted, these recommendations produce an aggregate Sharpe Ratio similar to that of direct channel funds.
While biases like overconfidence, mental accounting, and loss aversion characterize individuals, little research has focused on whether distribution professionals attenuate—or magnify—these biases. For example, while investors might have bounded rationality—and be unable to process the mountain of information on the thousands of funds available—paid professional advisors might be able to help them sift through all of this data and make better investment decisions.
Parties who advise clients about investments and sell them financial products may owe their clients certain duties that are higher than “caveat emptor.” At a minimum, brokers are subject to NASD rules, which include a requirement that they recommend suitable investments for their clients. Financial advisors, as fiduciaries of their clients, owe an even higher standard of care, and must put their clients’ interest ahead of their own.
* Conclusions and Future Work
Our study of mutual fund distribution channels and the customers who use them attempts to understand how the various channels differ and the nature of the relation between channel and consumer behavior. We begin with a positive hypothesis: the prominence of funds sold through brokers implies that brokers provide consumers with valued services.
Our study has identified few, if any, of these benefits.
The bulk of our evidence fails to identify tangible advantages of the broker channel. In the broker channel, consumers pay extra distribution fees to buy funds with higher non-distribution fees expenses. The funds they buy underperform those in the direct channel even before deductions of any distribution related expenses. Even before accounting for distribution expenses, the underperformance of broker channel funds (relative to funds sold through the direct channel) costs investors approximately $9 billion per year.
As a whole, the broker-channel funds exhibit no superior asset allocation. With respect to behavioral biases, the pattern of evidence depends on the specification chosen. There is no consistent evidence that funds sold through the broker channel exhibit substantially greater or less trend-chasing behavior. Finally, realized flows of money into individual funds appear to flow into brokered funds with larger front end loads and 12b-1 fees, consistent with the notion that paying more to the sales force may influence consumer buying behavior.
The price of free advice Machiel van Dijk, Michiel Bijlsma, Marc Pomp (2006)
What factors determine how well consumers make their actual choices with regard to financial products? This paper empirically evaluates two different choices consumers make when buying deferred annuities. One choice concerns the type of insurance policy, the other concerns the choice of insurance provider. For both choices we will analyse what factors explain the quality of the choice made. In particular, we will investigate the role of financial advice in the decision making process. By combining Dutch consumer survey data and data on quotations by Dutch life insurance companies, we obtain the following results. First, respondents who buy their policy directly from an insurer attain a significantly better match between their risk preferences and the type of policy chosen than respondents who purchase their policy through an insurance broker. Second, respondents who buy their policy through an insurance broker obtain a significantly lower pay-out than respondents who purchased their policy directly from an insurance company. These results raise doubts about the functioning of both the market for financial advice and the market for life insurances.
commission awareness – i.e. knowing that financial advisors are being paid on the basis of commission - is a significant determinant of the choice of distribution channel: the higher the level of commission awareness, the lower the probability of using an insurance advisor. Second, stated risk aversion is found to be a significant determinant of product choice in the case of direct purchase: the higher the level of risk aversion, the higher the probability of purchasing a safe product.
A well functioning retail market for financial products requires, inter alia, that consumers can find the product that matches their preferences at the lowest possible price. Financial products, and in particular life insurance products, are generally considered to be complex. Searching and comparing financial products can therefore be difficult and time consuming. For this reason, many people rely on financial advisors to help them choose the right products. However, the market for financial advice may not function properly. In particular, due to the incentive structure in his market (commissions paid by insurers) coupled with the infrequent purchase of these products and the lack of sufficient expertise by consumers, financial advise may be biased This bias may take several forms. First, if advisors earn more on certain types of products than on other types of products, this may give rise to biased choice of product type. Second, if advisors earn more on products from firm A than on products from firm B (within a given type of product), then this may lead to a bias in the firm choice.
Mutual Fund Fees Around the World. Good stuff - professional article
Mutual fund fees: (2007) Among recent fund buyers, 74% say they considered fees and expenses before investing. Indeed, costs were the factor cited most often, even edging out fund performance, which was mentioned by 69%.
• Total annual stock-fund costs, including fund-sales commissions, or "loads," plunged to 1.07% of assets in 2006 from 2.32% in 1980. Meanwhile, total annual bond-fund costs dropped to 0.83% from 2.05%. The ICI's figures are asset-weighted, which means popular funds have the biggest impact on these numbers.
What's driving the decline in costs? Much of the credit goes to fund buyers, including ordinary investors, 401(k) plans and financial advisers. "The bulk of the flows go into lower-cost fund. "Investors are more sensitive to fees."
• The growing focus on costs is forcing funds to hold down expenses. At least 48% of stock funds and 55% of taxable-bond funds are -- for now -- waiving part of their fund expenses, calculates investment researcher Morningstar Inc.
• Maybe the clearest sign of investors' penny pinching is the explosive growth in exchange-traded index funds, which trade like stocks and are renowned for their low expenses. As of May 31, ETFs boasted $486 billion in assets, up from $151 billion at the end of 2003, according to the ICI.
"The one area where you see outright price competition is index funds," including both ETFs and regular index mutual funds. For instance, he notes Fidelity Investments has capped expenses on its core stock-index funds at 0.1%, rather than risk losing assets to lower-cost competitors.
There is, however, still plenty of room for improvement, by both fund companies and fund investors.
Consider mutual funds' stock trading, which isn't included in standard expense ratios. Turnover ran 65% in 2006, implying an average holding period of 18 months, versus 30% in 1976, which suggests a three-year holding period. These figures exclude index funds.
Owning a fund with 65% turnover is like paying roughly an extra 0.6 percentage point in annual expenses. Today's frenetic buying and selling is "ridiculous," says John Bogle. "These managers are just trading with one another."
Bogle also argues that funds still have ample room to trim fees, noting that stock funds levied $63 billion in total costs in 2006, versus $1 billion in 1980. But he says most fund companies resist cutting expenses. One reason: They can probably make fatter profits by charging higher fees, even if they attract fewer assets.
That means that, if investors want lower costs, they will have to continue voting with their feet. Morningstar calculates that, among funds open to ordinary investors, 13% of stock-fund assets are in funds charging 1.5% a year or more, while 24% of taxable-bond-fund assets are in funds levying 1% or more.
It would be easy enough for these folks to slash their costs. Ten years ago, according to Morningstar, there were just 173 stock-mutual funds and ETFs charging 0.5% a year or less. Today, there are 576 such funds.