FYI: ( Click On Article Title At Top Of Google Search)
It has taken index fund evangelist John Bogle 40 years to get the mutual fund industry to be comfortable talking about fees. Everyone now agrees that they matter. But there’s another way Bogle likes to look at fees that no one’s talking about. Instead of just comparing funds’ expense ratios, as is standard practice, he thinks investors should also examine the total dollars that each fund collects in fees.
There are two reasons why calculating total-dollar fees matters. One is legal. “The Gartenberg court decision in 1982 determined that a mutual fund fee has to be so large as to offend the conscience of the community before the courts will intervene,” Bogle says. “A percentage fee can never offend anyone’s conscience. What does one say about a fee that should be 0.5% but is 0.75% instead?”
Regards,
Ted
https://www.google.com/#q=Mutual+Fund+Fees:+How+Low+Is+“Low”?+barron's
Comments
I totally get one should look at how much the fund company is raking in. That's why one needs to observe if ER is going down when assets are going up or not. One also has to look at the management fee portion of the total ER since some fund strategies are costly to implement and one must weigh that before purchasing any actively managed fund.
What I don't get is the comment about whether it needs really $1B to run a $128B. Of course not. Since when has it been about that? The larger the fund asset base, the larger the management fee as a percentage. A fund manager is successful when he generates more revenue for his fund company. Are we going to pretend it is anything else? If the asset size of fund grew more because of appreciation and less because of asset accumulation, then didn't the investors think it is worth it. You pay more for an iPhone than other phones right?
VFINX ER is 0.15 (or whatever it is does not matter). What if the assets of VFINX were 10th of its current size. Are we going to ANALize how much it is going to cost to run this fund based on its asset size now? Someone of Bogle's standing IMHO should do more about railing against investors. Tell them to vote with their feet and SELL funds with $128B in assets who are raking in $1B in fees. Or is he suggesting capping fund expenses beyond a certain asset size of a fund? That would be a fantastic regulation. I
Finally, anyone who buys a load fund needs to have their head examined. If it is because they are working with an advisor, then as I have said many times we need to put that occupation out of business. I want Bogle to write articles about advisors who are selling loaded funds with 5.75% loss upfront. I want him to rail about M* doing analysis about how American funds (who can do no wrong) are cheap because even if most people pay a load, over time they cost less because their ER is lower. I listen to Bogle when he rants about indexing vs active management. Indexing is what I use largely in my tax deferred plans. If I was saying same thing for 50 years, I would think it is quite enough and at age 85 take a chill pill.
BTW, Alan Greenspam. Please go away as well. No one needs to hear your expertise on how to (mis)manage the fed.
I'm sorry, but this "news" is only slightly less annoying than "who killed marilyn monroe" shows which TV channels show whenever nothing else interesting is happening in the world. Does anyone have an original idea to help investors?
End of rant.
PS. For the record, I do NOT want Mr Lewis Branham to go away. I DO WANT Greenspam and BogleMyMind to go away or comment on some other topic. Write a cookbook or something.
The second reason is actually more relevant to MFO readers. These giant funds suffer other costs not recognized by the expense ratio, namely market impact costs that makes it more expensive to trade illiquid securities. Asset growth also makes it more difficult to have a high active share ratio as fund portfolios become more index like as assets grow. The comparison in the story is highly relevant as the JOHCM International Select Fund is run by a small boutique shop that closed the fund to new investors at around the $3 billion mark. As such, it faces much less of the market impact cost and closet-indexing problems of a much larger $128 billion fund. It also happens that it is collecting much less in total dollars of fees as a result. Yet because everyone is looking at expense ratios instead of total dollars in fees it gets penalized for having a higher expense ratio by Morningstar and investors. That seems unfair to me. It also happens that JOHCM International Select is a fund David has reviewed for MFO. So I think the story is relevant here.
I don't necessarily disagree with you about load funds and the high front-end commissions, but that is another story entirely--not the one I wrote in this case.
http://www.morningstar.com/cover/videocenter.aspx?id=685180
There are fixed costs incurred by a fund. So many funds with low asset bases close because those assets cannot fund - no pun intended - the beast, where now fund company ends up operating fund at a loss.
The SAI of a fund does indicate where the expenses charged by the fund is going. Would we benefit from more disclosure? Sure. I'm saying there is enough information already. If expenses are the end all and be all, then we are all crazy to invest in actively managed funds.
I'm not saying your article is not relevant. I'm saying this problem if we accept it exists, is unsolvable unless we start capping fees for management as well as fixed costs, with trading costs being the only variable to account for the rest of the fees - more assets can possibly cause more commissions when fund has to buy larger quantities of shares of stocks it owns. The devil is in the details and the devil is here already. My point, investors have to share equal blame for investing in funds that are charging them too much.
As an investor, to me the ER is amount of $ I spend for every $1000 invested. My perspective is different from someone else's who's sitting on the side with an excel spreadsheet. JOHCM is collecting less fees, because it is managing fewer assets. The difference in assets between that fund and the American fund is so large, the ER becomes irrelevant since the percentage works off a much large asset base at the former. JOHCM is being fiscally responsible and investors should stay with that fund because they should believe JOHCM has investors best interest in mind and will be able to overcome any impediment of the ER over the long haul as opposed to the American fund.
I am not seeing the point saying American as a company is raking in more dollars but their fund has smaller ER. As an investor and IF I didn't pay the load, I would indeed pay less per $1000 would I not with the American fund? If both funds returned the same return, and everything else regarding taxes remaining the same, will I not keep more of the returns with the American fund? If not, American should be hauled into court because they are hiding stuff in their SAI.
From a legal perspective it's important to recognize that A) Most investors are not as sophisticated as you, but B) and more important, even if they are many don't have much of a choice as to the funds they invest in. Those invested in 401ks have a limited selection of funds to choose from and for many investors with limited assets and time to research investing that is the only place they invest. So the question as to whether adequate economies of scale are being recognized for those imprisoned investors is relevant to these law suits. I know this from personal experience. I have a relative for instance who has a retirement plan with terrible fees on its funds, but there's no way she's not going to participate in that plan because of the generous match from her employer for every dollar she contributes. She is stuck with that plan and those funds. For that kind of investor this questions regarding economies of scale and total dollar fees is vital from a legal perspective. Regulators, judges and fund boards of directors should be paying attention to this kind of fee analysis for shareholders, but they aren't.
Regarding your comparison of $1,000 invested in both American and JOHCM, your comparison is valid for the individual shareholder, but again that misses the point of these hidden market impact costs and loss of active share. The expense ratio doesn't measure those and most investors are not paying attention to the SAI. At best they may go to the Morningstar report and see the "Low" fee label on one fund and the "High" on another and ignore the rest. Of course, that "Low" rating also factors into Morningstar's "Gold, Silver, Bronze" ratings on funds. And that drives assets to those funds.
Regardless of the gyrations of the market, asset under management never return a negative profits for fund managers. A fund that charges an ER of 1% on $1,000 invested will earn $10 return/year. If the market correct 50% and that $1,000 investment falls to $500 the fund company still earns a positive 1% or $5.
To me, this is the reason why there is such a motivation for the fund company to add assets under management (AUM). Profits for fund companies are often less about growing the mutual fund share price (fund performance) and more about growing the assets under management.
To me, the dirty secret is that fund management fees are always positive and are only more or less positive as it related to assets under management at any one time. Investors who pay these fees are additionally exposed directly to losses due to market risks. Fund managers deal with market risk by growing assets under management, not necessarily by focusing on the performance of the fund.
- The mutual fund shareholder, not the fund manager, assume market risk. If an equity fund experiences a 50% market correction the equity investor must absorb a 50% loss.
- Fund companies are profitable regardless of market performance. The fund manager continues to make a profit, sometimes a smaller profit, but still a profit.
- Fund managers deal with "lower profitability" from market risk by increasing their assets under management.
As an aside:
It would be interesting to look more closely where these fund manager invest their profits since most fund managers commonly don't invest in the own mutual funds.
MFOer Bee ended his/her submittal with the following aside: “It would be interesting to look more closely where these fund manager invest their profits since most fund managers commonly don't invest in the own mutual funds.”
This closure is definitely more than an aside. It is an important indicator when selecting a mutual fund. It might not rank as highly as a low expense ratio criterion, but it is a significant signal. Having significant skin in the game addresses commitment.
Bee is correct when he/she observes that most fund managers do not have that commitment. Although the percentages are not compelling, a surprising large number of fund managers do taste their own cooking. According to a Morningstar study, that number is in the vicinity of about One thousand loyal partakers of their own cooking. Good for them, not so good for those who abstain.
Here is a Link to a recent WSJ article by Liz Moyer that summarized some findings from the Morningstar study that was completed by Rus Kinnel:
http://www.wsj.com/articles/find-mutual-fund-managers-who-eat-their-own-cooking-1433518014
One shocking statistic that was uncovered by Kinnel’s research is the following: “Balanced funds, which own both stocks and bonds, exhibited the starkest difference in performance in the Morningstar study. The success rate for balanced-fund managers with no money invested was 32%, compared with 85% for managers betting more than $1 million.” That’s quite a jump in performance success when contrasted against a respectable benchmark.
Indeed, skin in the game is a primary motivator and a measure of a fund manager’s commitment to the investment policies that is practiced.
Best Wishes.
Fund A
Assets: $100B
ER reported: 0.5%
Avg Annual Return: 10%
Fund B
Assets: $1B
ER reported: 1.5%
Avg Annual Return: 10%
Returns are always after expenses. I care about who makes how much money why now? I make 10% in each fund. If either fund is misrepresenting expenses and investors would have ended up with higher return, then all crusaders can go complain to justice department.
25 years back, when information was not forthcoming may be this makes some sense. In today's time with the internet, every fund investor knows all things remaining the same, go with the lower ER fund. If you are going with higher ER fund, do it for a reason - lower asset base, better fiduciary management, etc. etc. "Investors need to know how fund expenses are being paid and who they are being paid to". No, they don't. Why? Because they cannot do diddly squat about it.
I would like Jack Bogle to give interview to someone else besides M*. Or I would like him to ask Christine Benz WTF one ANALyst or another at M* marries American Funds every other week. All well wishers of fund investors, please stop telling investors what they should do and go tell/appeal to those who make money off those investors.
So yes, we have bad people in this world. The misrepresent stuff. The buyer buys a product based on sticker price and how good he thinks it is. Samsung overtook Sony in the TV market because their performance was equal with lower sticker price. Whether Samsung made more or less profit than Sony on individual TV sold is relevant to buyer? We need to know? Sorry...
Once again, I do not have problem with your article. I have problem with people grandstanding. There I've said it. Say what you mean and mean what you say. Bogle should write an op-ed piece saying "these are the fund companies who are misrepresenting their ERs and these are the rating agencies that are letting those fund companies get away with it". Investors are not stupid. They will vote with their feet. I bought Samsung not Sony.
morningstar.com/funds/xnas/acinx/quote.html
morningstar.com/funds/XNAS/GPIOX/quote.html
That "low" expense ratio rating factors into Morningstar's "silver" rating of Acorn. But is it really low if Acorn is collecting many more millions in fees than Grandeur? Is it really low if Acorn now has to navigate illiquid foreign small caps as a result with a large $7.3 billion portfolio? It's market impact costs will be higher and its flexibility to invest in the smallest companies less than Grandeur. Only by looking at total dollars in fees would someone recognize that Acorn isn't necessarily a low fee fund and Grandeur isn't necessarily a more expensive one.