If this has been discussed at length already, please forgive me (and someone share the link!) but I wanted to ask you all how much you're willing to pay in expense ratios? Ed's commentary this week made me think of this again.
The conventional wisdom is, the cheaper the better, but with a few funds you really do seem to get your money's worth. According to M*, PDI charges a 2.17% fee after excluding interest expenses. With interest expenses (for leverage), the fee is 3.15%. The advisor fee is 2.10%. Yet it's been a remarkable performer and has outperformed PIMIX, by the same manager, which only charges 0.45%. And that manager, Ivascyn, has been putting his own money into PDI. Of course he, like most of us, could be overestimating his ability to add value, and we'll have to see if PDI holds up as well as PIMIX next downturn.
My most expensive funds are HUSIX, small value, 1.85%, and GPIOX, foreign small cap, 1.73%. I'm a little uneasy about both, especially HUSIX, since there are good and somewhat cheaper SV funds out there. HUSIX and GPIOX have both earned their money so far, but wow, what a high hurdle they have to overcome.
My thoughts are that with high ERs, you're betting you've got a genius on your hands (and not someone who just got lucky for a few years), while with cheap ERs, a team that's merely very good can earn their fees. Since genius is tough to spot, logicially I should have all my money with D&C and Primecap, but I don't. (Though a Primecap fund is my single largest holding.)
Yet Ed's commentary this month made me think about the other side of the coin: if the fees are too low, talent will flee, and a mediocre fund won't even earn back its modest ER.
What are your thoughts? How much are you willing to pay? What are your highest conviction high cost funds?
Comments
Other than those, I think AZMIX at 1.30% is my highest cost fund. It's emerging markets so that's not out of line.
That's 1.15% of all assets under management, including the borrowed money (leverage). Since the borrowed money (amount of leverage) is 44.24% of the total assets of the fund, the expenses as a percentage of the amount that investors put in (as opposed to being borrowed) are nearly double the stated 1.15%. I come up with 2.06% vs. M*'s 2.17%, which is based on the older leverage figure found in the annual report - 47.20%.
Viewed this way, the total cost of borrowing adds about 2% to the ER: 0.98% direct cost of borrowing money and about 1% to manage the borrowed money. (Personally, this doesn't make me any more comfortable, but at least the management fee is not some totally outrageous percentage of AUM.)
BTW, have you read the prospectus (well, offering)?
In the case of each fund I own, a bit more than 20 of them, I consider the expense ratio as one aspect of whether I want to trust them with my money. In the case of Primecap, I love that the expense ratio is low, and I think they far more than earn it. In the case of Grandeur Peak, I don't like that the expense ratio is as high as it is, but I feel like their approach, their shareholder friendliness and the fact that the managers as a group have a lot of money invested in each of their funds gives me confidence that the expense ratio will be worth it.
@msf, I guess that makes sense about PDI, but I'm not sure it makes me feel better -- it gives the manager an extra motive to lever up, though he's got a ton his own money in the fund that I presume he believes what he's doing. Is that common for CEF expenses?
I haven't read the prospectus/offering, I'm not planning to invest in it unless there's a major dip (I like my bond funds boring), though I sure regret not having bought it a year ago. Anything striking in the prospectus?
I have a lot, for me, in PDI too.
Bottom line for me is that I really do not much care about ERs given performance, but I do try to watch it all closely, sure, and my average is below-average.
I only dug up the offering for a clearer description of the expenses. So I haven't looked through the rest of the doc. If I were considering an investment, I'd be reading through it to understand all the types of securities it might buy, how it treats currency, how it compares in strategy, flexibility, and risks with PIMIX. I'd be especially focused on how it manages risk, given its high leverage and short lifetime.
With respect to ERs I generally try (but don't always succeed) to keep domestic stock funds under 1%, bonds under 0.5%, with a little more play (10 basis points or so) for international stock, small caps. Like others, I'd consider special funds that slightly exceed these parameters, such as the aforementioned LSBDX (0.63%), and TGBAX (0.61% - I wouldn't pay up for TPINX even load-waived).
Actually, M* calculates your average ER when you use their X-ray feature. My last one was around .80% which I'm comfortable with. Probably lower than most due to having little in international equity funds and shying away from the goanywheres.